What is a Direct Mutual Fund? Everything You Need to Know

A direct growth mutual fund allows investors to buy mutual fund units directly from the Asset Management Company (AMC). Regular growth mutual funds, on the other hand, are distributed by intermediaries. An extra commission is present in regular growth plans due to the presence of vendors. 

The absence of intermediaries makes expense ratios for direct plans lower due to the absence of intermediary commissions. But, higher fees of regular plans sometimes come with the benefit of the professional guidance of an investment advisor, which is not the case in direct plans.

Understanding the difference between direct and regular plans is important to make right financial decisions. This article provides insights into direct growth mutual funds and how they differ from regular plans. 

Key Features of Direct Mutual Funds 

Following are the key features of Direct Mutual Funds: 

• Lower Expense Ratio: Direct plans have lower expense ratios due to the absence of mutual fund distributors or vendors. Cost for investors becomes lower in direct plans because the fees given to intermediaries are eliminated. 
• Reinvestment of Profits: Profits earned by direct mutual funds are reinvested instead of being paid as dividends. This compounds the returns over time. 
• Higher Net Asset Value (NAV): Due to the absence of excess commission being paid to a vendor of mutual funds, that amount is reinvested, and thus, with time, the NAV of direct plans becomes slightly higher than regular plans.
• Suitable for Knowledgeable Investors: Some investors who have knowledge about mutual funds and do not need professional advice can choose direct funds to save costs.

Key Difference Between Direct Plan and Regular Plan 

The key difference between direct and regular plans are as follows:

• Expense Ratio: Direct mutual fund schemes always have a lower expense ratio than regular mutual fund plans because direct plans cut out the mutual fund distributor or middleman. Investors can buy mutual fund units straight from Asset Management Companies (AMCs). This gets rid of the fees or commissions linked to intermediaries, which results in a lower expense ratio. 
• Returns: A direct plan gives its investors slightly higher returns than regular plans due to the absence of intermediary commissions. Commissions paid to mutual fund distributors or middlemen in regular plans directly impact the returns of investors. The excess amount that is saved in direct plans is reinvested and thus gives more returns. 
• NAV: Net Asset Value (NAV) calculates the per share net assets (assets – liabilities) of a mutual fund. Since the money paid as commissions in regular plans is reinvested in direct plans, these have slightly higher assets than regular plans. That in turn, leads to slightly higher NAV in direct plans. 
• Professional Advisory: Regular plan distributors often provide professional investment advice to investors to compensate for the extra charge. Any investor who does not have appropriate knowledge can seek professional advice by choosing regular plans and paying extra charges. Whereas someone who has knowledge about mutual funds and wants to actively manage their investments can choose direct plans. 

Criteria	Direct Plan	Regular Plan
Commission Paid To Brokers	No commission paid to intermediaries	Commission is paid to intermediaries
Expense Ratio	Direct plans have lower expense ratio	Regular plans have higher expense ratio
Returns	Direct plans have higher returns	Regular plans have lower returns
NAV	Direct plans have higher NAV	Regular plans have lower NAV
Professional Advisory	No professional advisory is given, investors conduct their own research	Intermediaries might choose to provide professional investment advisory services

Risks Associated with Direct Plans

While direct plans offer lower expense ratios and a higher NAV, they still carry their own risks. Such as: 

• Investors who choose direct plans need to do their own research and pick mutual funds on their own. They do not get the benefit of professional financial advice. 
• Investors also have to navigate market cycles and fluctuations themselves while choosing direct plans. Investors should have the proper knowledge before choosing direct plans. If an investor is unsure about which investment to choose, they can seek professional advice from an intermediary. 
• Direct plans and Regular plans are all susceptible to market fluctuations and market risks. Although managed by professional fund managers, all mutual fund schemes carry inherent risks. Understanding the risk associated with investments is of utmost importance. 

How to Invest in Direct Mutual Funds?

An investor must follow these steps to clearly identify and invest in a direct mutual fund: 

Step 1: Mutual funds make it clear if a scheme is a direct plan or a regular plan. They include the words ‘direct’ or ‘regular’ in the name of the mutual fund scheme. 

Step 2: To figure out if a mutual fund is a direct or regular scheme, an investor can look at the expense ratios and NAVs and read the mutual fund’s factsheet. Direct plans have higher NAV and lower expense ratio as compared to regular plans. 

Step 3: Read the fund’s monthly factsheet. All the details are clearly mentioned in the factsheet. 

Step 4: Investors can put money into a direct plan by going to the AMC’s website or through registered brokers.

Conclusion

An investor can choose a direct plan of a mutual fund if they clearly understand this asset class and do not want to spend money on professional advisory. But if an investor cannot regularly track their portfolio on their own and needs professional advice, they might choose regular plans, where they can avail of the service by paying extra fees. Before investing, it is necessary to understand and thoroughly research the asset class you are choosing to invest in. Are you willing to start your investment journey in mutual funds or require expert assistance for your decisions? Download the Powerup’s Financial Planning app today!