What are differences between direct and regular funds and do they make a difference?

I have been hearing a lot about the savings I stand to make if i invest via direct mutual funds, can someone explain the differences between them.

If you want to buy vegetables, you have two options - you either buy it directly from the farmer at a slightly lesser price or you walking to the local kirana store and pick up the vegetables.

Likewise, if you want to buy MF, then you can directly walkin to the Asset Management Company’s (AMC) office or website and buy the fund. This is called ‘Direct’. In this case, you will get the NAV of the mutual funds at a slightly lesser price.

Or you can choose to buy the funds from a distributor. The same fund in this case is refereed to as a ‘regular fund’.

If you know which fund to buy (from which AMC etc), opt for direct. Else seek advice and go for a regular fund.

1 Like

The major difference between direct and regular plans are in term of the expense ratios.
Expense Ratio: Expense ratio is a percentage of the assets, used to manage the fund per fiscal year. It is usually charged for expenses such as management fees, administrative fees, operating costs and other fund expenses. So when you are buying direct Mfs the additional expense you incur is in turn paid to the intermediaries who are distributing the fund.
So for Ex; If you are investing Rs.20,000 in a fund with 1% expense ratio you are paying the fund Rs.200. So if the fund earns 12% you are in reality getting a return of 11%.

When you are investing in funds directly through the fund house (AMC) they are called as direct funds.
When you are investing through platforms/intermediaries like Zerodha or other distributors they are called as regular funds.

Does it make a difference if I choose a direct fund?
If you are investing via direct funds, you are saving the additional commissions you would have paid in the regular funds. So this usually adds up to anywhere between 0.50% and 0.75%.

What benefits do I get if I invest through regular funds?
When you are investing in regular funds you get benefits such as recommendations, Investment tracking/rebalancing, platforms etc.

So should I choose direct or regular funds?
If you have the know how to pick a right fund then you should definitely choose direct funds. On the other hand, if you getting started with investing then choosing a direct fund does not make sense. Because picking a wrong direct fund can cost you dearly.

Note: If you want to hold all your securities in your demat account, the only way to do it is by investing in regular funds.