scorecardresearchDirect or Regular Mutual Funds: What gets you higher return?

Direct or Regular Mutual Funds: What gets you higher return?

Updated: 17 Mar 2022, 08:17 AM IST
TL;DR.

The difference in returns between direct and regular mutual funds could be as high as 100 basis points.

Direct mutual funds have lower total expense ratio (TER)

Direct mutual funds have lower total expense ratio (TER)

There is a saying: ‘the more, the merrier’. More often than not, investors also aim for the returns which are as high as possible. This precipitates the need to explore mutual funds that offer high returns and accompany lower cost.

When you invest in a mutual fund you — essentially — have two alternatives. The first option is to buy a direct mutual fund plan, and the second is regular plan. In the former, investors can buy mutual fund units directly from an asset management company (AMC), whereas in the regular plan, the sale and purchase happens through a mutual fund broker.

To understand the key distinction between a direct and regular plan, it is imperative to first deconstruct the concept of total expense ratio (TER). This refers to the cost which is incurred in managing a fund.

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The total expense ratio (TER) is charged proportionately against the scheme assets and adjusted in the net asset value (NAV) of the unit. This includes management fees, trustee fee, marketing.

The TER also includes distribution costs which is the commission paid to the financial advisor or mutual fund distributor who are intermediaries between investors and AMC.

As expected, the TER rises in a regular plan simply because the cost of mutual fund distributor (in form of commission) is added to it, whereas in the direct plan — no such cost is added and the transaction takes place between an AMC and investor — thus keeping the total cost lower.

 

Difference in returns posted by regular & direct mutual funds

Mutual FundRegular Direct  Difference (basis points)
DSP Top 100 Equity Fund 5.486.28     80
HDFC Top 100 Fund11.77   12.4265
IDBI India Top 100 Equity16.61 18.03   142
IDBI India Top 100 Equity9.20 10.03   83
Tata Large Cap Fund13.56   14.49   93

(Returns are for 1-year in percent as on March 15, 2022)

(Source: AMFI)

 

Key differences between regular and direct mutual fund plans

Regular mutual fundsDirect mutual funds
Regular plans have lower Net asset value (NAV)These plans have higher Net asset value
Because of higher TER, returns on regular plan proportionately declines.Because of lower TERs, these plans have higher returns.
Mutual fund distributors can advise on which funds are good to invest for investors. Direct plans are meant for DIY (do it yourself) investors.     

As discussed in the table above, the returns and NAV on direct mutual funds are higher, whereas the total expense ratio (TER) is lower. The difference in the returns between a regular and direct mutual fund can be as high as 100 basis points.

It is interesting to note that investors can also visit a user-friendly app or website to buy direct mutual funds without having to pay commission. These platforms include Coin by Zerodha, Paytm Money, Kuvera, CashRich and paisabazaar, among others.

First Published: 17 Mar 2022, 08:17 AM IST