Direct vs Regular Mutual Funds - Cost & Returns
Explore how Direct Mutual Funds can boost your returns by up to ₹10.8 lakh over 20 years compared to Regular plans.
Mutual funds have emerged as one of the most popular investment options for retail investors in India, due to their professional management, diversification, and convenience. However, while choosing a mutual fund, investors often face one crucial decision: Direct vs Regular plans.
At first glance, both plans invest in the same portfolio and are managed by the same fund managers. Yet, the difference lies in their cost structure, and this small detail can significantly impact long-term wealth creation.
In this blog, we’ll explore the difference between direct and regular mutual funds, explain their cost structures, and analyze how these differences affect long-term returns.
What are Direct Mutual Funds?
Direct mutual funds are plans where investors invest directly with the Asset Management Company (AMC), without involving intermediaries such as distributors, brokers, or advisors. As a result, direct plans have a lower expense ratio since there are no distributor commissions.
The lower costs translate into higher net returns for investors over time. Therefore, direct mutual funds are best suited for investors who are financially literate, comfortable researching funds, and don’t require constant advisory support.
Understanding Regular Mutual Funds
Regular mutual funds are purchased through intermediaries, including brokers, distributors, and relationship managers. These middlemen offer customer service, portfolio recommendations, and advice in return for commission. Each of these services has a price tag and distributor commissions, which increase the expense ratio.
Since a portion of the returns goes toward commission, the high cost leads to slightly lower returns than direct plans. Regular mutual funds are therefore the best option for investors who want regular portfolio management, professional guidance, and assistance.
The real game-changer between mutual fund direct vs regular is the expense ratio. Let’s understand this with an example:
- Investment Amount: ₹10,00,000
- Time Horizon: 20 years
- Assumed Fund Return (before costs): 12% CAGR
- Expense Ratio (Direct): 1%
- Expense Ratio (Regular): 1.8%
- Returns from Direct Plan: After 20 years, the corpus grows to approximately ₹80,62,312 lakh.
- Returns from Regular Plan: After 20 years, the corpus grows to approximately ₹69,76,408 lakh.
- Difference: The 0.8% higher expense ratio in the regular plan results in a difference of ₹10,85,904 lakh over 20 years.
The above-stated example shows how even a small cost difference compounds massively in the long run.
Direct vs Regular Mutual Funds: Differences
The key differences between the direct and regular mutual funds are:
Should investors always choose Direct Plans?
While the direct plans offer higher returns, they may not be suitable for all. Let’s weigh the benefits and disadvantages.
The benefits
- Higher returns due to lower expense ratios
- Improved Cost Structure due to transparency
- Best for DIY investors who keep a close eye on funds
The disadvantages
- No professional advisory services
- Risk of selecting the wrong fund if the investor is uninformed
- Requires time, research, and monitoring
Which fund is right for you?
Both direct and regular mutual funds have their own advantages and disadvantages. Choosing between these two options depends on individual investors' requirements.
Direct plans best suited for:
- DIY Investors: Investors who understand markets and can research funds independently.
- Cost-Conscious Investors: Those investors who are focused on maximizing long-term returns.
- Tech-Savvy Investors: Investors who are comfortable using apps and AMC portals for transactions.
Regular plans best suited for:
- Beginners: New investors who need guidance on fund selection.
- Busy Professionals: Investors who lack time to track, rebalance, or analyze markets.
- Advised Investors: Investors who prefer the comfort of having an advisor for financial planning.
The hybrid approach
Many investors adopt a hybrid strategy in which they initially start with regular plans for confidence and guidance, then over time shift to direct plans as they develop market understanding.
This approach offers a good mix of hands-on support with reduced costs. In addition, some investors choose fee-based advisors. In this, investors pay a set cost for advice, but invest in direct funds, thus reducing commissions while still having access to expert advice.
Explore Dhan’s Mutual Fund Returns Calculator to track and maximize your investment growth.
Wrapping up
When it comes to direct vs regular mutual funds, the core difference lies in costs. Over the long term, the difference in expense ratios can erode or enhance wealth creation significantly. Investors should choose direct plans if they are confident, disciplined, and want to maximize returns. In contrast, they should choose regular plans if they prefer convenience, guidance, or are beginners.
Ultimately, the right choice depends on an individual investor's financial literacy, time availability, and comfort level. However, what remains constant is that mutual funds, whether direct or regular, continue to be a powerful vehicle for long-term wealth creation.
