Difference: Regular vs Direct Mutual Funds

When you invest in mutual fund plans in India, two of the most popular options that come to mind are regular and direct plans. Both can multiply your money in the years to come, but they differ considerably regarding fees, usability, and the amount of advice you receive. Knowing their difference can help you choose the correct option based on your investment experience and goal.

Regular vs Direct Mutual Funds?

Regular Mutual Funds

They are bought through intermediaries, brokers, distributors, or advisors who guide you through the buying process. The consultancy incurs a cost to you, which is included in the cost ratio of the fund as a commission.

Direct Mutual Funds

You purchase them directly or online from the mutual fund house. There is no intermediary, and yet the price to you is lower. But with the price comes your responsibility to make and manage investments.

Here is a table summarising the major differences between regular and direct mutual funds:

How to Invest in Mutual Funds?

Investing in these mutual fund categories is relatively simple:

• For Regular Plans: Meet a mutual fund advisor or distributor. You will have to complete your KYC, and then you can invest on their platform, online or offline. Most funds permit SIPs of ₹500 and upwards.
• For Direct Plans: Go to the fund house’s website or use popular websites. Complete your KYC, then begin investing. As with regular plans, SIPs can be initiated at ₹500.
• Tracking Your Investments: Under any plan category, continue to track fund performance regularly.

Recommended Read: Documents required to Invest in Mutual Funds

Mutual Fund Types Available Under Both Plans

These are three types of mutual funds available under the Regular and Direct Plans:

• Equity Funds: They invest primarily in equity shares of the listed firms of the stock exchanges. They may have a greater long-term potential to give higher returns, but with an equivalent greater market risk. They suit high-risk-tolerance investors with long investment periods.
• Debt Funds: Invested in fixed-income instruments such as bonds. Lower returns but safer. They are safer than equity funds with assured returns and low volatility, perfect for conservative investors or short-term use.
• Hybrid Funds: Hybrid mutual funds buy debt and equity instruments with a perspective of return and risk moderation. Hybrid funds are suitable for those who are seeking a moderate return and risk. Hybrid funds are suitable for the investor seeking diversification through a single product.

Risks to Consider

All investments are subject to risks. Being aware of them can help make wise decisions between direct and regular plans:

• Market Risk: Each mutual fund, particularly equity-oriented mutual funds, is exposed to market fluctuations. A decline in the share market can impact the worth of your investment.
• Advisor Bias: In traditional plans, advisors are free to sell higher-paying funds instead of ones that are best for your case. While most advisors are truthful, investors need to be vigilant and do some independent research.
• Self-Directed Risk: Direct plans entirely put the onus of research and decision-making on you. If you’re a beginner investor or make poorly researched decisions, you could end up investing in funds with poor track records or taking on more risk than you would want to

Strategies for Selecting Plans

It mostly depends on your financial knowledge, your ability to take risks, and your preference if you opt for direct plans or regular plans. This is how you plan:

• If You’re Starting: Begin with basic plans. Learn alongside a mutual fund advisor, then consider switching once you feel confident:
• Cost-Conscious Investors: Right away, choose long-term SIPs to benefit from low fees and compounding.
• Keep it simple: Use mix-and-match. Pick regular plans for complex investments and direct plans for simple ones like index funds.
• Align with Goals: Select a plan that fits your goal. For short term needs, a regular plan may be suitable. If you’re amining to build wealth over the long term, a direct plan could be the better option.

Regular vs Direct in Different Investor Profiles

Understanding your profile helps you make a choice that is appropriate for your lifestyle and financial goals. This is how investor profiles fit into these plans:

• New Investors: Being a new investor, you will find regular plans more suitable for you. Regular plans give the guidance you require so that you don’t end up paying heavily for mistakes and wrong decisions until you are confident on your own.
• Experienced Investors: If you are comfortable with mutual fund types, market cycles, and asset allocation, direct plans are inexpensive and easy. They enable you to avoid paying commissions and completely control your portfolio.
• Busy Professionals: If you don’t have time to research and keep track of your portfolio regularly, regular plans have the advantage of an advisor to counsel you and make changes for you.

Tax Implications

Tax treatment is the same for regular and direct plans. The only variation is in the final returns because of the cost involved:

• Equity Funds: LTCG over ₹1 lakh is taxed at 10% without indexation if held for more than 12 months. Short-term gains (less than 12 months) are taxed at 15%.
• Debt Funds: Earnings are taxed as per your income tax bracket since indexation advantage has been taken back from April 1, 2023.
• Impact on Returns: Direct plans have lower fees, so over time, they give higher after-tax returns than regular plans, even though both are taxed the same.

Regular vs Direct for Specific Goals

Selecting the plan according to your financial goal is important so that you’re neither overpaying nor underprepared:

• Short-Term Goals: If you’re saving for a short-term goal like a vacation, electronic purchase, or emergency fund, regular plans in debt mutual funds may be beneficial. An advisor can help you pick low-risk funds with stable returns and provide guidance on entry and exit timing.
• Long-Term Goals: For goals like retirement, children’s education, or buying a house, direct plans in equity mutual funds could be more advantageous. The lower fees over long periods can result in higher accumulated wealth, provided you’re comfortable managing the investment yourself.

Recommended Read: Mutual Fund Schemes to Invest

Conclusion

Regular and direct mutual fund plans both give you access to the same set of funds, but each of them works in a different manner, access in a different manner, charges different costs, and provides different levels of hand-holding you can have. By understanding the direct vs mutual funds comparison and matching the type of plan to your investor profile and desired goals, you can invest in mutual funds more confidently at a reduced cost.