The difference between direct and regular mutual funds

Flexibility is the hallmark of mutual funds. You can invest in them in two different ways based on your convenience and expertise.
 

Few investment instruments have struck a chord with investors like mutual funds. The flexibility to start small and use compounding is central to mutual funds' success, with investors pouring in thousands of crores through SIPs (Systematic Investment Plan). While mutual funds are a worthwhile investment option, investors must understand key concepts to get the best out of them. One of the essential aspects to consider with mutual funds is direct vs regular mutual funds.

What is the difference between direct and regular mutual fund?
 

As its name indicates, a direct fund helps investors directly invest in a mutual fund scheme by contacting the asset management company (AMC) or mutual fund house directly. As is evident, no intermediary is involved in buying a direct plan from a mutual fund house. On the other hand, a regular fund's purchase happens through an intermediary. They can be purchased through brokers, advisors, banks, or distributors.

How do the returns differ?
 

It has been observed consistently that an AMCs direct fund plan offers higher returns as compared to a regular fund plan. It is mainly due to the additional fee charged by intermediaries, who handle mutual funds investments and provide.

• Advisory services
• Submitting Know Your Customer (KYC) documents to registrars and transfer agents (RTAs) or AMCs
• Helping investors throughout the investment process
  
  

How does the Net Asset Value (NAV) differ?
 

A direct fund's NAV is lower, allowing investors to purchase more units. Whereas a regular fund's NAV is higher, owing to the mutual fund distributor's commission.

What purposes do both funds serve?
 

An important point to be kept in mind is that both direct and regular funds serve the same purpose despite catering to different types of investors. A mutual fund scheme, today, is just as popular an investment scheme as a fixed deposit (FD). Salaried employees and self-employed professionals generally do not have the time to track the market regularly and lack the required expertise to yield regular returns.

A regular fund is ideal for such an investor as this expertise is helpful in the long term. On the other hand, an experienced investor who tracks the market regularly can approach the AMC directly and purchase a mutual fund.

How does the fee differ?
 

The Total Expense Ratio (TER) calculates the total costs needed to manage and operate a mutual fund. A mutual fund scheme's TER includes management fees and additional expenses such as registrar's fees, trustee fees, and marketing and distribution costs. The TER of a regular fund is always comparatively higher as it also includes agent commission.

TER rules are framed and regulated by the Securities and Exchange Board of India (SEBI). SEBI sets upper and lower limits to the TER that a mutual fund scheme can charge from investors based on different investment slabs.

How to invest using direct and regular funds?
 

There are various ways of investing in a direct or regular fund. You can invest in a direct fund online through the mutual fund's website or with online brokers. The same goes for investments in regular funds, whereby you can choose brokers, distributors, or banks such as IDFC FIRST Bank.

With IDFC FIRST Bank, you can invest in mutual funds online, avail yourself of tax benefits, and seek expert advice about your mutual fund portfolio.

Disclaimer

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