Direct funds vs regular funds: Differences, key things to remember, and which option investors should choose

Mutual fund investments are considered among the best ways for an ordinary retail investor to book capital gains. A popular tool to achieve financial goals and grow your wealth, MFs have a long-term horizon of five to 15 years with reasonable financial security. However, there are varying levels of risk attached based on the type of scheme and that's why you have to choose carefully before making an investment.

Here, we explore the differences between direct mutual funds and regular mutual funds, the benefits, risks and considerations to keep in mind, before making your choice.

Mutual fund investment: What are direct funds?

Direct funds are mutual fund plans where investors apply directly with a fund house without an agent, bank or broker. The biggest advantage of this method is eliminating commission fees, which you can instead add to your investment sum.

Introduced by the Securities and Exchange Board of India (SEBI), direct funds allow investors to have full control over their investments and gain complete rewards from the capital growth. Notably, these are available for debt, equity or hybrid funds, and can be invested in through the asset management company's (AMC) app or website.

Nothing about the function of the fund you invest in is different. Once your investment is added to the pool, the fund manager's decisions apply equally for all unitholders. Only, you have removed the middleperson. The key factor here is your savings: You have a lower expense ratio by removing associated charges.

Overall, for the same money invested, direct plans show better returns when compared to regular plans as the total amount is larger due to no deductions for commissions.

What are regular funds?

Regular funds are mutual fund plans where you invest through a bank, broker or financial advisor, who guides you on which fund to choose and invests the money on your behalf. However, as seen in the illustration above, these “middlemen” charge a commission for their services. These charges are added to your fund's expense ratio and slightly reduces your returns.

Please note that it is a good option for first-time investors with no knowledge of the markets and want to learn and gain experience first.

Direct Funds vs Regular Funds: What are the key differences?

Should you choose direct plan for mutual funds?

Investing in direct plans calls for awareness of the markets and proper evaluation of your own profile, risk appetite and financial goals. You will also need to assess and match which funds meet your requirements after rigorous research, which may not suit all investors. An intermediary allows you to leave the assessment to a professional, but these services come with associated costs.

For instance, direct plans don't provide a record of your investments (you have to do it yourself), the documentation for tax filing has to be updated yourself, you also have to facilitate redemptions, etc., without that is given in regular plans.

Hence, direct funds are most suitable for investors who have the resources and expertise to investigate mutual funds independently.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.