Regular vs Direct Mutual Funds: What is the difference?

Mutual Funds are available in two forms: Direct and Regular. While direct plans are more popular among investors, understanding the difference between Regular and Direct Mutual Funds is crucial before investing. In the following sections, we will explain both forms in detail. 

What are Direct Mutual Funds?

Direct Mutual Funds are Mutual Fund schemes that investors can directly purchase from an AMC (Asset Management Company) without any middleman involved. Aspiring investors can buy the funds from their preferred AMC's website, offline by visiting their office or by contacting a SEBI Registered Investment Advisor (RIA). Since the Mutual Fund scheme does not involve any Mutual Fund distributor, investors can save on commission costs, resulting in a lower expense ratio than Regular Mutual Funds.

What are Regular Mutual Funds?

Regular Mutual Funds are Mutual Fund schemes that prospective investors can purchase from Mutual Fund distributors. These distributors use their knowledge, experience and expertise, based on which they help investors choose the right Mutual Funds to invest in.

Once the investor selects a Mutual Fund, the distributors submit their KYC documents to AMCs or Registrar and Transfer Agents (RTAs). They streamline the investment process by handling the application forms, cheques and other formalities. For their service, the distributors charge a commission to the AMC, which they eventually charge the investors, thereby increasing the total expense ratio. 

Difference between Regular and Direct Mutual Funds

Regular and Direct Mutual Funds differ from each other in several ways, which include the following:

• Expense Ratio: Direct Mutual Funds have a lower expense ratio than Regular Mutual Funds because no middlemen are involved. Thus, they offer more convenience and higher investment returns.
• Intermediary: Investors can purchase Direct Mutual Funds from AMCs directly without involving any intermediary. However, in a Regular Mutual Fund, they must buy the fund through a broker or intermediary who receives a commission for their service.
• Convenience: Direct Mutual Funds are accessible online through the AMC’s website or app. Therefore, investors can purchase and manage their investments separately. However, with Regular Mutual Funds, they must approach their intermediary for every detail or transaction.
• Returns: In the long run, Direct Mutual Funds deliver higher returns due to their lower expense ratio, while Regular Mutual Funds include broker commissions that take a slice of the investor's returns. The difference may range from 0.5 to 1%, affecting returns. Over time, this small difference can consume a large chunk of the Mutual Fund's final returns.
• Net Asset Value (NAV): A Mutual Fund's total expense ratio largely affects its NAV. Since Regular Mutual Funds have a higher expense ratio than Direct Mutual Fund schemes, the NAV of Regular Mutual Funds is lower than direct ones.

Investors must consider these differences carefully before investing, to maximise their returns and achieve their investment goals.

Advantages of Regular Mutual Funds

Despite low expense ratios and higher returns, many investors still choose Regular Mutual Funds over Direct Mutual Funds for many reasons. That is because Regular Mutual Funds offer several advantages, including the following:

• Convenient investment: Mutual Fund investment is complex, especially for beginners. Investors must make informed decisions based on their profile, risk appetite, investment goals and other parameters. Since the process is time-consuming and requires a lot of research, an intermediary makes everything quick and effortless. They use their expertise and experience to find a Mutual Fund best suited to the investor’s profile.
• Expert guidance: Fund distributors guide their clients through the investment journey, utilising their market knowledge and experience. They handle the research and comparison work on their client's behalf and help investors make the best investments.
• Portfolio monitoring: Many investors struggle to keep up with fluctuating market conditions. With regular Mutual Funds, advisors monitor market trends and advise portfolio restructuring, if necessary. Conversely, Direct Mutual Fund investors must regularly monitor their portfolios and make deliberate decisions.
• Value-added services: Regular Mutual Fund investors enjoy several other value-added services from their brokers, including maintaining investment records, providing tax proofs for ITR filing etc.
• Goal-based planning: With Regular Mutual Fund plans, financial advisors or distributors prepare customised investment plans aligned with the investors' financial goals. As a result, investors get a personalised approach while navigating market fluctuations.

How to identify a Regular or Direct Mutual Fund

Here are a few ways to identify whether a Mutual Fund is Regular or Direct:

• Fund name: A Regular Mutual Fund has ‘Regular’ or ‘Reg’ in its name, while a Direct Mutual Fund has 'Direct' or 'Dir'.
• Consolidated Account Statement (CAS): Check the fund’s CAS to determine if it is Regular or Direct. Look for the ‘Advisor’ field and check whether it mentions an Application Reference Number (ARN), followed by a number. If it does, it is a Regular Mutual Fund.

Choosing between a Regular and Direct Mutual Fund

The primary distinction between a Regular and Direct Mutual Fund is an intermediary's presence and service-related costs. A direct plan helps save money and generates higher returns due to its lower expense ratio. However, a Regular Mutual Fund brings the experience of an expert for better decision-making. Therefore, the final choice between a Regular and Direct Mutual Fund depends on the scheme type that suits the investor more.

Experienced investors with proper market knowledge may opt for a Direct Mutual Fund plan. However, new investors must invest in Regular Mutual Funds due to value-added services, convenience and security. Market experts will continuously monitor their investors' portfolios to generate maximum investment returns. Although they charge a convenience fee for their service, the returns they help generate are much higher.

Understanding the difference between Regular and Direct Mutual Fund plans help make the right investment decisions, while safeguarding financial interests. Moreover, diversifying investments across various asset classes is a good strategy for effective risk management. 

How to Invest in Direct or Regular Mutual Funds?

Mutual Fund investments are a great way to increase your wealth over time and save for major financial goals, including retirement. In India, you can select an option between Direct and Regular mutual funds.

Direct mutual funds are bought directly from the mutual fund company, without any intermediaries or agents. Because there is no middleman involved, there is no commission and hence the expense ratio is lower. It helps you earn slightly better returns over time. If you are wondering how to invest in Direct mutual funds, it's simple. You can invest in direct mutual funds by completing your KYC and investing directly through the fund house’s website or app.

On the other hand, Regular mutual funds are bought through a distributor, broker, or financial advisor. They help you choose the right fund, and in return, they earn a small commission from the mutual fund company. While you pay a slightly higher expense ratio, you also get expert advice and guidance. You can visit ICICI Bank’s website, create an account, complete your KYC process, and start investing in Regular mutual funds online.

So, if you are confident in choosing funds yourself, go for direct mutual funds. If you prefer expert help, regular mutual funds may suit you better. Either way, make sure your KYC is updated, and start with a small amount to begin your investment journey. 

FAQs

Are Direct Mutual Funds riskier than Regular Mutual Funds?

Both regular and direct mutual funds have the same level of risk. The key difference lies in how you invest, i.e. directly from the fund house (Direct Mutual Funds) or through an intermediary or financial advisor (Regular Mutual Funds).

Who should invest in Regular Mutual Funds?

For someone who is new to investing or needs expert guidance, regular mutual funds are a suitable choice. A financial advisor can help you choose and manage your investments, making it easier even if you don't understand the market well.

How can I identify if my Mutual Fund is Direct or Regular?

Check your mutual fund statement or an ICICI Bank customer can also check the same on the iMobile App on their smartphone. If the word "Direct" is in the plan name, it’s a direct fund. If not, it's regular.

Are Direct Mutual Funds harder to manage?

They can be, especially for beginners. You will need to research, track performance, and make decisions on your own. But with some learning and online tools, managing direct mutual funds becomes easier over time.