Mutual funds have seen a significant rise in popularity among individuals looking to diversify their portfolios and maximise financial returns. These funds act as collective investment vehicles, pooling money from numerous investors who share a common financial objective.

Professionally managed and diversified across various asset classes, mutual funds enhance investor diversification. The fund’s assets are managed by a fund house, with managers strategically investing in different instruments such as equities, government securities, and corporate bonds, in line with the scheme’s investment goals and risk profile.

Investors in mutual funds can choose between two main types: direct or regular plans, each designed to meet specific preferences and objectives.

Direct Mutual Funds

Direct mutual funds are investment schemes offered directly by the fund house or asset management company (AMC) to investors, providing a streamlined approach to investing. By purchasing these funds directly, investors can bypass intermediaries such as brokers, distributors, or financial advisors. This not only simplifies the investment process but also eliminates the need to pay commissions or distribution fees associated with third-party intermediaries. As a result, direct mutual funds typically have a lower expense ratio compared to regular plans, allowing investors to retain more of their returns.

The expense ratio represents the fees charged for managing and operating the fund, which can significantly impact overall investment performance over time. By choosing direct plans, investors can take advantage of these cost savings, which can compound in their favor over the long term.

Accessing direct mutual funds is straightforward; investors can purchase them through the fund's official website or by visiting the fund house in person. This direct access empowers investors to make informed decisions about their investments while potentially enhancing their overall financial outcomes.

Regular Mutual Funds

In contrast, regular mutual funds are purchased through intermediaries such as brokers, financial advisors, or distributors. These intermediaries provide a range of valuable services, including personalized investment advice, portfolio evaluation, and transaction assistance, helping investors navigate the complexities of the investment landscape.

However, this intermediary involvement comes at a cost. The fund house compensates these intermediaries with a commission or distribution fee, which slightly increases the expense ratio for regular mutual funds compared to their direct counterparts. This commission ultimately affects investors' overall returns, as the fund house typically passes these additional charges on to the investor.

As a result, the higher expense ratio can diminish the potential gains that investors might otherwise realize from their investments. For individuals who are particularly cost-sensitive or who prefer a more hands-on approach to managing their investments, these added costs may be a significant consideration. Understanding the differences between regular and direct mutual funds is crucial for investors aiming to maximise their returns and make informed decisions that align with their financial goals.

While the expense ration is one of the major difference between a direct and regular mutual funds, there are other factors that differentiate them

Difference Between Direct And Regular Mutual Fund

Net Asset Value: Fund houses incur various expenses for managing the fund, which are charged from the NAV of the fund. As the regular fund has a higher expense ratio due to the commission and brokerage involved, the NAV of the regular schemes is generally lower than the direct plans since there is no commission or brokerage in direct plans. 

Returns: Direct plans offer higher returns due to a lower expense ratio than regular funds. You get the benefit from the exclusion of distributor commissions, which leads to higher returns. Unlike direct plans, regular plans have a higher expense ratio, which eats out your return and offers slightly lower returns. 

Role of Financial Advisor: In direct plans, you directly deal with the asset management company. Here, you invest in the scheme as per your own decision and requirement hence, there is no role of financial advisor. However, in the case of regular plans, financial advisors assist you in the investment process. They help you decide where to invest and how much to invest based on your investment objectives.

What Should You Choose?

Regular funds are ideal for investors who require ongoing support and guidance from financial advisors to make informed investment decisions. These advisors provide personalised advice and help develop goal-oriented investment strategies. However, these benefits come at a cost, as regular funds typically have a higher expense ratio due to the commissions and brokerage fees charged for their services. While the difference in expense ratios between regular and direct funds may be minimal, it can have a significant impact on your long-term returns.

On the other hand, direct funds cater to investors who prioritise cost efficiency and seek higher returns. With lower expenses and no commissions or brokerage fees, direct funds allow you to maximise your returns over time. This cost-effectiveness is particularly appealing to those who are comfortable making independent investment decisions and conducting their own research. In direct plans, you invest directly on your own, making them a suitable choice for confident investors.

Ultimately, if you require regular support and advice from a professional, regular funds may be the way to go. However, if you are looking for a cost-effective option that offers zero commissions and brokerage fees, allowing you to achieve maximum returns in the long term, direct funds would be a better fit.

Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.