Direct or regular mutual fund plans: Which one works for you?

While investing in mutual funds in India, investors have a choice to buy the same fund under a Direct plan or under a Regular plan. In both plans, the constituents of the fund remain the same i.e the fund holds the same securities in the same proportion. However, there is an important difference in mutual fund investment through a Direct plan and a Regular plan: prices are often dramatically different as regular plans include distributor commission etc as we have explained below.

Let’s take an actual example of a large-cap mutual fund. Investor A and investor B both wanted to invest in a large-cap fund. Both decide to invest ₹ 10,00,000 in the same large-cap fund, except “A” purchased under a Direct plan and “B” purchased under a Regular plan. Let’s explore how their investments fared over a 10-year period.

The above example shows that, whilst both “A” and “B” invested the same ₹ 10,00,000 in the same fund, their total investment value after 10 years is different. Investor B earned ₹ 4,18,000 less than investor A even though both of them purchased the same fund. The difference in returns between the Direct plan and the Regular plan was due to the fees / commission included in the product. Regular plans have higher cost than Direct plans. This results in lower returns and lower Net Asset Value (NAV) of the fund. To understand this better let's look at how fees and expenses are included in mutual funds.

When investors invest in mutual funds, their returns are adjusted for expenses and fees. The expenses / fees included in mutual funds are asset management fees, service provider fees (e.g. transfer agents) as well as distribution fees. Whilst asset management fees and service provider fees are common to both Direct plans and Regular plans, distribution fees are only applicable to Regular plans.

It’s important for investors to note that expenses and fees are deducted from the returns of the fund on a daily basis and adjusted in the Net Asset Value (NAV) of the fund. Whilst investors may think they do not pay fees separately, the fees are already included in the expenses of the product, making it less transparent to see how much they pay.

Whilst investors can pay fees / commissions for various services provided while investing, it is important to be aware of the presence of fees / commissions included in products, and whether these provide value for money for the services provided.

Over the last 5 years, investments in mutual funds through Direct plans have surged. Direct plans now make up 51% of total mutual fund industry’s AUM, up from ~25% in 2020.

Source: AMFI

Thanks to increasing investor awareness, ease of access through digital platforms and AMCs offering direct access, mutual fund investors are becoming more cost conscious.

When investing in mutual funds, the choice between Direct and Regular plans can significantly affect your long-term returns. Both provide access to the same fund, but Direct plans allow you to retain more of your gains by eliminating embedded commissions and distribution costs. If you are unsure about choosing the right funds and want a more personalised approach to investing, with tools that put you in control and advice tailored to your risk tolerance, investment horizon, and investment objectives, a SEBI Registered Investment Adviser (RIA) works in your interest. An RIA can help select the right funds, monitor your portfolio, manage risk, and ensure your investments remain aligned with your objectives, all through transparent, fee-based guidance - sometimes at a lower cost than a non-fiduciary would charge.