Regular Funds vs Direct Funds – Which is the best?

Last Updated : April 10, 2020, 6:33 p.m.

Every mutual fund scheme has two options for an investor-regular and direct. There is an expense ratio in every mutual fund scheme-basically the cost of which one pays to the mutual fund company for managing money. The fundamental difference between choosing regular or direct is based on this expense ratio. Let us understand what both these are before concluding which is the best.

Regular Funds

While investing when we take advice from a mutual fund distributor, which could be a bank, individual or some other organization, then such investments are made under the regular plan. Typically, expense ratios vary from 0.10%-1.50% in debt schemes and 1.00%-2.50% in equity and balanced schemes. A part of this is shared with the mutual fund distributor or advisor as a commission for rendering its services. Thus, investments made with assistance are done under a regular plan.

Direct Funds

Direct plans mean investing directly with the mutual fund company i.e. without the involvement or assistance of a financial advisor. Popularly known as Do it yourself (DIY), here an individual basis his or her understanding chooses funds and invests directly with the mutual fund. The medium of investing could be online or offline. Since no advisor or distributor is involved, no commissions or brokerage are paid, thus lowering the cost of investing or expense ratio. Generally, expense ratios in direct plans are 0.05-0.50% in debt schemes and 0.20-1.00% in equity and balanced schemes.

Pros & Cons of Investing in Regular Plans

• Investment is done with the assistance of a financial organization/advisor who is a specialist or expert in his/her field.
• The logistics and processes like filling forms, making switches, getting KYC done, etc, are taken care of by the advisor.
• Advice is given on portfolio management basis market movement.
• Curated portfolios are designed basis an individual’s needs
• Behavioural hand holding is done by the advisor in tough times.
• The cost of investing is higher by 0.50%-1.00% depending on the fund.
• There is a possibility of biased advice if the advisor isn’t trustworthy

Pros & Cons of Investing in Direct Plans

• Cost of investing is lower by 0.50%-1.00%
• A deep understanding of various funds and markets is vital before investing directly.
• No biased advice received from anyone.
• Logistics towards filling forms, KYC, making changes in investment, etc, have to be carried out by the individual himself.
• Asset allocation and portfolio management have to be taken care of by the individual himself.

Conclusion-Regular or Direct-Which is the Best?

There is no right or wrong among regular and direct plans. The choice completely depends on the individual who is making the investment. If the individual is a pro in investing, has a deep understanding of markets and can manage his/her behaviour especially during market downturns direct plans are the best for him/ her. He/she would save on cost which would add to his/her returns. On the other hand, if an individual isn’t sure of selecting the right funds, doesn’t understand asset allocation or portfolio management and needs hand-holding from an expert, he should go for regular plans. Though the cost in regular plans is a tad higher, it could prove to be invaluable if he has a good advisor. A good advisor by recommending the right set of schemes, constantly monitoring portfolios and advising changes at the right time could more than cover up for that extra cost. For people who are beginners and planning to invest for the first time regular plans are certainly a better option since choosing the right funds among more than 10,000 schemes is difficult.