Direct Mutual Funds

Direct Mutual Funds: Features & Benefits

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Direct Mutual Funds or Regular Mutual Funds? many of the mutual fund investors having a big confusion. especially for the beginners in the mutual fund. when we plan for a mutual fund investment we will see two options. Direct MFs and Regular MFs. there are many differences between these two. as the name implies, direct funds are the type of funds where the investor can directly invest in the fund. regular funds are the type of funds where investors invest through a third party, like a broker or mutual fund distributor. people can choose the mutual fund type according to their comfort. in this post, we will discuss the difference between Direct Mutual Funds vs Regular Mutual Funds.

Also read: Direct Mutual Fund Platforms in India

Direct Mutual Funds

These are the type of mutual funds where an investor can directly invest in the fund without the help of any intermediary. Direct mutual funds can be easily purchased directly from the asset management company(AMC). since the investors are directly interacting with the AMC there is no intermediary like brokers, sub-brokers, and mutual fund agents. no need of paying commissions or brokerage charges involved in these intermediary transactions. so the expense ratio of the direct funds is comparatively lower than that of regular funds.

Key Features of Direct MFs

  • No need to depend on a third party to make investments.
  • Mutual funds can be easily purchased from AMC websites.
  • You can nake the invest in direct funds both online and offline.
  • Low expense ratio.
  • Transaction charges are not levied.
  • The returns of the direct plan are higher compared to regular mutual funds.
  • NAV is declared separately for direct mutual funds plans.

Characteristics of a good Direct mutual fund

  • will offer good returns over a long period.
  • It is not affected heavily by the fluctuations of the market.
  • The expense ratio is lower compared to peer funds.
  • Offers diversification of the portfolio.
  • The fund manager will have an excellent track record.

Regular Mutual Funds

Regular funds are the type of mutual fund schemes that are selling through agents and distributors. here the investors are not dealing with the AMC directly. there will be commissions or brokerage charges involved in regular funds. Investors are not paying the commission directly to the broker or the agent. the AMC is collecting it through the expense ratio and transfer it to the agent or distributor. Therefore, the expense ratio of regular funds is comparatively higher than direct funds.

Differences between Direct MFs vs Regular MFs

Direct Mutual FundsRegular Mutual Funds
Invest without involving distributors or mutual fund brokersInvest with the help of distributors or mutual fund brokers
Expense ratio lower as compared to regular plansExpense ratio higher as compared to direct plans
Get higher returns compared to regular plansGet lower returns compared to direct plans
Investors need to do their own analysis and select top-performing mutual fund schemesBrokers offer guidance and perform all the operational tasks on behalf of the investors
No commission paid to brokersHidden commission paid to brokers
NAV of direct plan is relatively higherNAV of regular plan is relatively lower
Document and KYC needs to be submitted on your ownAdvisor will collect KYC and other documents

Also read: What is a New Fund Offer(NFO) and its importance?

Advantages of investing in direct mutual funds

As we already discussed, direct mutual fund plans have many advantages over regular plans. Low Expense Ratio, Higher NAV are the prime advantages. another important advantage of the direct mutual fund plan is High Returns, it is explained below

  • High Returns: since there is no brokerage in the case of direct funds, the expense ratio of direct funds would be comparatively lower than that of regular funds. The difference in the returns between the regular and direct funds might look negligible, but it would be massive if you stay invested for the long term. Here’s an example: Let’s assume that you invest Rs 12,000 a month in SIP for eight years in both regular and direct plans offered by an AMC. Let’s consider that the returns provided by the direct and regular funds are 11% and 10% respectively. In the case of regular funds, the AMC pays a brokerage of 1% to the third party. The following table depicts the corpus accumulated at the time you redeem your units:  
ParameterDirect FundRegular FundDifference
Monthly SIP amountRs 12,000Rs 12,0000
Investment Tenure8 years8 years0
Returns 12%11%1%
Amount accumulated at the time of redemptionRs 19.19 lakhRs 18.34 lakhRs 0.85 lak

Final Thoughts

Direct Plan or Regular plan? many of the mutual fund investors having a big confusion. especially for the beginners in the mutual fund. in this post, we discussed Direct MF vs Regular MFs. and the features of Direct MF. I hope this post will give a good idea about Direct MFs vs Regular MFs. and I hope now you will be able to choose the best plan for your mutual fund investment.

Happy Investing

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