Fisdom wins the Best Financial Services Partner Award - Know more ×

Direct v/s Regular Mutual Funds

  • Akshatha Sajumon
  • 12 Jan
  • 9 minutes

Patience is the key to wealth creation in any investment strategy and investment in mutual funds is one of the smartest ways to multiply your savings. Investment in mutual funds is like selecting one’s choice of flowers to make a beautiful bouquet. When we talk about mutual funds one has two options to channelize your money either in a lump sum or via systematic investment plans (SIP). These investment options can be availed either by a direct plan or a regular plan. 

A Direct plan means investing in a particular mutual fund scheme directly by the investor without any intermediary like an advisor or an agent. Whereas, regular plans refer to those where the investment is made with the help of an investment advisor or a professional.

Through this page, we aim to help you understand the basics of investments in mutual funds and the difference between a direct plan and a regular plan.

What is a Mutual Fund?

A mutual fund is an investment pool where the general public invests their money in small quantities and that collected pool of money is then invested in buying shares, bonds, and/or other investments. There are several mutual fund categories in which an individual can invest in. These mutual fund schemes may be focused or diversified across sectors.  Any investor as per his/her risk appetite, desired return, and time horizon can select and invest in these mutual funds via professionally managed fund houses. The investment made by the individual in a mutual fund scheme is divided into units based on the NAV (Net Asset Value). The NAV keeps changing depending upon the performance of the fund. 

As mentioned earlier, an investor has two options to invest in mutual funds- one is a direct plan and the other is via an investment advisor/agent/distributor in a regular plan. Now, let us understand these two plans in detail.

What is a Direct Plan?

When an investor directly invests in a mutual fund scheme offered by fund houses on his own without any help or advice from a distributor or an advisor then such an investment is called an investment via direct plan. As there is no distributor, advisor, or agent there are no commission or distribution charges and therefore the investor gets the full return benefit from that mutual fund scheme. 

Investment in a direct plan is suitable for those investors who possess a good understanding of the mutual fund schemes, their operations, and performances, when to enter, when to exit, long term or short term, and who can select the fund house and fund manager as per his risk and return appetite. 

It is to be noted that the expense ratio of a typical mutual fund scheme is lower as compared to a regular plan. This is due to the absence of distribution charges or commissions paid to the distributors or agents. So, the Net Asset Value (NAV) of a direct plan scheme tends to be slightly higher than that of a regular plan.  

What is a Regular Plan?

Imagine you are planning a holiday trip to Europe and you do not have much idea about the countries to cover and visit; the budget and mode of travel in-between countries; the hotels to stay in, etc. In such cases, you will not be able to plan a trip by yourself rather you would require a travel agent company who can plan your entire trip that too within your budget and requirements. 

The scenario is the same for investors who cannot manage investments on their own. In such a case, the distributor or the broker suggests the best mutual fund schemes by the investor’s risk-taking capacity and desired return within the required time horizon.  Here the investment in the mutual fund scheme is suggested by the broker and then the investment is made via such a mediator. 

For such financial and investment advisory there are inbuilt brokerage or commission charges paid to the brokers, agents, or distributors. This commission is in turn charged to the expense ratio which increases the expense ratio.  Because of commission/distribution expenses paid to the intermediary, the return in a regular plan is marginally less as compared to that of a direct plan. Here the expense ratio is a bit high and as a result, the NAV is lower than that of a direct plan.

Portfolio and Fund Management of Direct & Regular Mutual Fund

Direct Plan and Regular Plan are both subcategories of the same mutual fund scheme. They .  have the same portfolio and are managed by the same fund manager, but have different expense ratios. Since the expense ratios are different the NAVs of both the mutual funds are also different. The higher NAV will give higher money benefits at the time of redemption.

Are direct plans of mutual funds better?

 As a retail (individual) investor, if you want to invest your hard-earned money you would want a diversified yet safe and return-oriented investment. A mutual fund is one such option that has the potential to fulfill different life goals. The mutual fund instrument gives you several different options to invest your money with direct or regular plans as per your preference. 

A smart investor is a person who always focuses on long term wealth creation. Many investors feel that they can decide on a portfolio mix keeping in mind their goals, risk appetite, and tenure. They have expert knowledge on how the markets work and can time their investments accordingly. A direct plan in mutual fund schemes works just fine for such types of investors.

If you are unsure about making the right choice of mutual funds for investment when going the direct mutual fund route, you can choose to invest through an App-based investing platform like Fisdom

Fisdom is an app-based direct mutual fund investment platform that comes loaded with many features and benefits. Read more:

  • Zero Commission and Zero Fees
    You can invest in Direct Plan Mutual Funds on Fisdom for free. You don’t have to pay any commission or fees to brokers or agents. Hence, you don’t lose a substantial amount of your investment money.
  • Portfolio Rebalancing
    Fisdom – Wealth comes with this feature that helps you to get your risk covered through regular and periodical balancing of your investment portfolio.
  • Smart Recommendation Engine
    Fisdom ’s smart recommendation engine suggests funds that have outperformed the market based on financial models and historical data.
  • Insta Switch
    This feature allows you to switch from your regular plans to direct plans making it possible to earn 1-1.5% more returns on your investment.
  • Advance Research Reports
    Investors get access to superior, advanced, and smart fund reports. As an investor, this gives you complete control of your investments with complete transparency.
  • Portfolio Alerts on the Go
    This feature allows investors to remain updated about his/her current portfolio at any time, anywhere, allowing you to invest to make informed decisions.

Benefits of investing in Direct Plans 

  • Cost-Effective: Investing via direct plan does not involve distribution and trail costs resulting in lower Total Expense Ratios (TERs). When the expense ratio is low, the NAV of the fund is high and eventually, the returns are high. By investing in a direct mutual fund, an investor can earn up to 1-1.5% additional returns which work up to quite a big sum over a period of time. 
  • Higher Returns: As discussed earlier, in the direct plans an investor does not have to pay hefty commission charges. This means that the returns from the direct plan will always be higher than that of a regular plan. Thus, if you are looking for maximising your returns, a direct plan approach would be the ideal option. 

          For Ex: An SIP of Rs 10000 p.m for a period of 15 yrs with direct mutual funds gets you a figure of Rs 33.98 lakh and the same amount with regular mutual funds gets your Rs 31.29 lakh, a difference of 9%. (This is assuming a modest return of 8%)

  • Avoid Mis Selling: In a regular plan, the broker or the agent is the one who acts as the intermediary for the investor. Many times, the investor may be advised to invest in funds that are not suitable for him but brings in better commission for the agent. You can avoid all those instances when you invest through a direct mutual fund. 
  • Simple Process: As far as a retail investor is concerned, investing in direct plans makes sense when you have a small corpus to invest in. Investing via direct plans is a simple process and does not involve any complex analyses.
  • Control: When an individual invests via a direct plan, he/she is in full control of their investments. There are times when the agent or a broker changes the location or profession or the AMC with which they deal. In such cases, you have to deal with everything related to your investments. So it is better to go direct and take full control of your investments.

Can you switch from regular mutual funds to direct mutual funds?

Mutual fund investors have an option to switch their regular mutual funds to direct and save on the commission costs. This conversion can be done online as well as offline. If you are looking to switch your plan online, it can be done by logging into your mutual fund account and selecting the switch option under the transaction page. However, if you wish to take the offline route, you can do so by visiting the respective fund house branch and filling up a switch form.

Or you could use the Insta Switch option on the Fisdom app which can help you switch your regular investments to direct plans

Is it good to switch from a regular plan to a direct plan?

The biggest advantage of opting for a direct plan is that investors do not have to pay any commission. If you are a market expert and have a keen interest in personal finance then direct plans can be a good option for you.  Or you could invest through app-based investment platforms like Fisdom where you could get value-added features like smart engine recommendations, portfolio rebalancing, and alerts. Investing in direct mutual funds through Fisdom lets an individual choose the right investment without having to spend time and effort in looking for the right mutual fund. 

Mutual fund investors should understand that switching from a regular plan to a direct plan or vice versa involves selling. The current units in one scheme are sold and new units in the desired plan are bought. There may be exit loads applicable on such transfer and tax implications should also be considered. Investors should take note of these and make an informed decision.

author image

Akshatha Sajumon