Regular vs direct mutual funds: How are they different from one another?

The mutual fund market is huge, offering different kinds of schemes to the varied needs of investors. Each fund varies from another based on the fund’s size, type of instrument, parties involved, etc.

Based on the parties involved in a mutual fund investment scheme, the fund is broadly divided into regular and direct mutual fund investments. In today’s article, we delve deep into the intricacies of the two types, along with understanding their differences.

What is a direct mutual fund?

A direct fund is where the investor directly connects with the asset management company and interacts with the mutual fund’s manager. This fund eliminates the need for an intermediary, making the transaction simple and less expensive, as there are no third-party fees involved.

What is a regular mutual fund?

A regular mutual fund is where a broker acts as an intermediary between the fund house and the end investor. Such intermediaries are usually brokers from brokerage firms or relationship agents in banks who tie up with asset management companies.

Since regular funds involve a third party, investors must pay additional commissions to them, making these funds more expensive.

Pros and cons of direct mutual funds

Advantages of direct plan mutual funds:

• Direct funds take place directly between the investor and the fund house. Hence, such transactions are more transparent and easy to handle.
• The absence of a third party reduces the expense ratio, thereby increasing the profit percentage for investors.
• Direct funds do not have a conflict of interest, as there is no intermediary to suggest investment strategies.

Disadvantages of direct plan mutual funds:

• Brokers may charge additional commissions, however, they help investors with expert investment opinions on the current market. Such professional guidance is lacking in direct funds.
• An investor’s capacity to expand investments and tap into new markets is limited. Hence, the options available for direct fund investors are less.
• There is always a challenge in finding the right fund, setting it up, transferring money between accounts, etc. Lack of support from brokers may devoid investors of these options.

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Pros and cons of regular mutual funds

Advantages of regular plan mutual funds:

• The primary benefit of the regular fund is the support by brokers. These brokers provide investment advice about the kind of funds to invest in, how to diversify, reach the financial goal, etc., making it easy for investors, especially, novice ones.
• Regular mutual funds are constantly monitored by brokers who help in the timely review of portfolios. They also suggest changes, if required, to maintain the risk-return balance. 

Disadvantages of regular plan mutual funds:

• The first and foremost disadvantage is the cots. The overall expense of the investment increases as it also includes a third-party commission to the broker. A higher expense ratio leads to a decreased return for investors.
• Another limitation is the possibility of conflicts between the broker and the fund manager. Since both are experts in the field, a difference in their opinions of the market can affect the investor’s decision-making abilities.

Differences between regular and direct mutual funds

There are three key factors distinguishing the two types of funds:

• Expenses and the Net Asset Value (NAV) – Since regular plan mutual funds involve an additional party in the transaction, the expense of such plans is higher. The charges related to a mutual fund’s management are deducted from the fund itself, reducing the total net asset value of the fund. Hence, a direct plan mutual fund will have a lower expense ratio and higher net asset value.
• Returns – A high expense ratio has a direct effect on the returns. It proportionally reduces the profit. Hence, the direct mutual fund provides a better rate of return as compared to the regular plan, since its total expenses are lesser.
• Intermediaries – The direct plan involves the fund manager managing the client’s money. A regular plan brings in a broker between the fund manager and investor to support the investor through the investment process. 

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Bottomline

Every mutual fund scheme provides two plans to investors – the direct plan and the regular plan. The choice between the two plans relies completely on the investors.

For investors requiring thorough support and assistance, the regular plan might be suitable. For investors who are self-sufficient in managing the fund and desire higher profits, the direct plan is more favourable. It is essential for investors to check the expense ratio and the mutual fund document to assess both plans and choose the best one.

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