Mutual funds have been a favored investment option for the past many decades since their launch in the Indian markets. These are dynamic investment options that can generate higher than market returns over a longer period of time as well as help the investors meet their various investment goals. There are many forms of investments in the mutual fund markets. Investors can opt for various categories of funds depending on their risk-return expectations, investment objectives, etc. These mutual funds can be invested through any of the registered brokers or fund houses or directly by the investor after thorough research and analysis.
There is a basic difference in the mutual fund categories based on their mode of investment namely direct mutual funds and regular mutual funds.
Given below are the details of these types of mutual funds.
Meaning of Direct mutual funds
Direct mutual funds are the mutual funds that can be invested directly through the fund house or the AMC or zero-fee, zero-commission investment platform like Fisdom . In this case, the AMC does not have to pay any commission to the fund house for an investment of the investors in their products. The name of the mutual funds specifically mentions the word ‘Direct’ to ensure that the investors can identify such plans as direct plans. These funds have separate NAVs and have a lower expense ratio as compared to regular plans.
Meaning of Regular mutual funds
Regular mutual funds are another category that can be bought through a broker registered, advisor, or distributor. The AMC has to pay a commission to such middlemen for every new investment by an investor. The expense ratio of such funds is higher than direct mutual funds. Regular mutual funds allow the investors to benefit from having professional fund managers’ expertise to manage their portfolios. This allows even novice investors to be part of mutual funds and thus get the benefits of the investment and eventually increase their wealth.
Basic differences between direct and regular mutual funds
Apart from the fund manager expertise, there are few basic differences between the two types of mutual funds mentioned above. Some of such differences are highlighted below.
- Expense ratio
The expense ratio of regular mutual funds includes various expenses like commission or charges of the intermediary (broker, advisor, etc.) This makes the expense ratio a bit on the higher side in the case of regular mutual funds as compared to direct mutual funds.
- Returns
The returns of direct plans are usually higher than the regular plans as they have comparatively a lower expense ratio.
- Target investors
The target investors of regular funds are investors who may not have a thorough market knowledge or expertise or even time to gain such knowledge. They rely on investment advisors or agents to manage their portfolios and generate higher returns.
But with app-based platforms like Fisdom , you may be able to make effective investment decisions on your own as you get research-backed sound fund recommendations that are suited to your requirements and risk tolerance.
Analysis of funds
The differences between direct and regular mutual plans can be better understood by analyzing the following funds.
ICICI Prudential Bluechip Fund is one of the prime mutual funds offered by ICICI Prudential Mutual Funds. This fund is available in the direct plan and regular plan. The regular plan of this fund was launched in the year 2008 and the direct plan was launched in the year 2013. Let us consider an initial investment of Rs. 5,00,000 under each plan to understand the returns generated and the difference thereby in each plan.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 14.46% | 13.55% | 0.91% |
| Expense ratio | 1.11% | 1.74% | -0.63% |
| Investment value at the end of tenure | Rs.9,82,288 | Rs.9,43,856 | Rs.38,432 |
Axis Bluechip is one of the many mutual funds offered by Axis Mutual Fund house and is available in direct as well as regular plans. The regular plan of Axis Bluechip was launched in the year 2010 and direct plan was launched in the year 2013. The difference of returns earned in each case can be explained in the following example.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 17.66% | 16.20% | 1.46% |
| Expense ratio | 0.50% | 1.77% | -1.27% |
| Investment value at the end of tenure | Rs.11,27,494 | Rs.10,59,255 | Rs.68,239 |
- Axis Long term equity
Axis Long Term Equity invests in premium equity assets to generate long term returns for the investors. The fund has direct as well as regular plans for the investors to choose from. The regular plan of Axis Long Term Equity was launched in the year 2009 and direct plan was launched in the year 2013. The difference of returns earned in each case can be explained in the following example.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 17.23% | 16.10% | 1.13% |
| Expense ratio | 0.80% | 1.67% | -0.87% |
| Investment value at the end of tenure | Rs.11,07,041 | Rs.10,54,705 | Rs.52,336 |
- ABSL Tax relief 96
ABSL Taxrelief Mutual Funds are one of the oldest mutual funds to be launched in the Indian market. The regular plan of the fund was launched in 1996 and the direct plan of the fund was launched in 2013. To know the difference in the returns generated in these plans let us consider the following example.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 13.37% | 12.26% | 1.11% |
| Expense ratio | 0.99% | 1.81% | -0.82% |
| Investment value at the end of tenure | Rs.9,36,399 | Rs.8,91,446 | Rs.44,953 |
- Canara Robeco Emerging Equities
This mutual fund is from the fund house of Canara Robeco Mutual Fund. The regular plan of this mutual fund was launched in the year 2005 and the direct plan was launched in the year 2013. The difference in returns earned on both plans is highlighted in the table below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 19.71% | 18.27% | 1.44% |
| Expense ratio | 0.64% | 1.87% | -1.23% |
| Investment value at the end of tenure | Rs.12,99,199 | Rs.11,27,056 | Rs.72,173 |
- Axis Mid Cap
Axis Midcap mutual fund invests dominantly in midcap companies. The regular plan of this fund was launched in the year 2011 and the direct plan was launched in the year 2013. The difference in the returns generated by the two funds can be highlighted in the table below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 21.28% | 19.80% | 1.48% |
| Expense Ratio | 0.52% | 1.87% | -1.35% |
| Investment value at the end of tenure | Rs.13,11,946 | Rs.12,33,827 | Rs.78,119 |
- SBI Small Cap
SBI Smallcap mutual fund invests primarily in small and midcap companies. The regular plan was launched in the year 2009 and the direct plan was launched in 2013. The returns generated over the years by the two funds are detailed below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 23.58% | 22.18% | 1.4% |
| Expense Ratio | 0.85% | 1.97% | -1.12% |
| Investment value at the end of tenure | Rs.14,41,156 | Rs.13,61,353 | Rs.79,803 |
- Kotak Small Cap
Kotak Small Cap Fund is one of the many mutual funds offered by Kotak Mahindra Mutual fund house and tracks Nifty Smallcap 100 TRI as its benchmark. The direct plan of the fund was launched in the year 2013 and the regular plan was launched in the year 2005. The difference in the returns generated by the two plans is tabled below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 21.90% | 20.19% | 1.71% |
| Expense Ratio | 0.52% | 1.98% | -1.46% |
| Investment value at the end of tenure | Rs.13,45,825 | Rs.12,54,041 | Rs.91,784 |
- Mirae Asset Hybrid Equity
This fund invests in debt and equity instruments and is one of the many funds offered by Mirae Asset Mutual Funds. The regular plan and the direct plan of the fund were launched in the year 2015. The difference in the returns generated by the funds since then is tabled below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 16.01% | 14.09% | 1.92% |
| Expense Ratio | 0.52% | 1.98% | -1.46% |
| Investment value at the end of tenure | Rs.10,50,624 | Rs.9,66,514 | Rs.84,110 |
- ICICI Pru Equity & Debt Fund
ICICI Prudential Mutual Fund has launched many funds in equity, debt, hybrid categories among others. ICICI Pru Equity & Debt Fund was launched in direct plan and regular plan. The regular plan was launched in 1999 and the direct plan was launched in 2013. The difference in the returns of these plans is highlighted below.
| Particulars | Direct plan | Regular plan | Difference |
| Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
| Period of investment | 5 years | 5 years | – |
| Rate of return | 14.87% | 13.81% | 1.06% |
| Expense Ratio | 1.34% | 1.81% | -0.47% |
| Investment value at the end of tenure | Rs.10,00,007 | Rs.9,54,711 | Rs.45,296 |
Conclusion
The direct and regular plans of mutual funds offer different levels of returns and expense ratios. These different investment options allow the investors to assess the fund and invest in them as per their convenience and preference. The above examples have shown that the returns of the direct plans are higher than the regular plans in the long run but are more suited to investors that have thorough market knowledge and a higher risk appetite.
FAQs
1. Is the NAV of direct plans higher or lower than regular plans?
A. The NAV of the direct plans is higher than the NAV of Regular plans.
2. Is it necessary to do thorough market research and analysis before investing in direct mutual funds?
A. Yes. Investment in direct mutual funds is done by the investors themselves without assistance from expert advisors, brokers, or distributors. Hence, the investors must have good knowledge about the market and the fund before making an investment decision.
3. Does a direct fund need to have the word ‘Direct’ in the name of the fund?
A. Yes. As per regulations of SEBI, a direct fund needs to mandatorily have the word ‘Direct’ in the fund name.
4. How can a person invest in direct mutual funds through Fisdom app?
A. Investment can be easily done through the Fisdom app in the following easy steps.
- Download the Fisdom app from Google playstore and Apple store
- Login to the account
- Select the fund from the available fund categories
- Start the investment by making an online payment from any of the available modes.
