Direct vs Regular Mutual Fund

  1. Importance of Personal Finance
    1. Personal finance: Why Is It Important?
    2. what is personal finance explained with example
    3. Compound Interest and Simple Interest Understanding Personal Finance Maths
    4. compounding effect Understanding Compounded Returns with Formulas and Examples
    5. value of money Exploring the Concept of Present and Future Value in Personal Finance
    6. Future Value of money Formula How to Calculate with Example
    7. Retirement Tips for How to Save, Plan, and Invest
    8. Inflation how it Impacts Your Retirement Income with formula and examples
    9. Diversifying Portfolio for a Secure Retirement example of Investing in Multiple Assets
    10. Retirement Corpus example Strategies and Assumptions for a Secure Future
    11. mutual funds introduction
    12. Asset Management Companies:Understanding Structure and Roles in Mutual Funds
    13. NAV Net Asset Value Understanding the Core Concept of Mutual Funds with example
    14. Net Asset Value in Mutual Funds Fair Division of Profits and Investor Returns
    15. Mutual Fund Fact Sheet A Comprehensive Guide Unlocking the Secrets of MF Factsheets
    16. types of mutual funds schemes as per SEBI October 2017 Circular
    17. MultiCap Funds
    18. Focused Funds
    19. Dividend yield funds
    20. ELSS Funds
    21. debt fund A Comprehensive Guide to Understanding What are Debt Funds in india
    22. liquid mutual fund
    23. Overnight Fund all you need to know about Overnight debt funds
    24. liquidity risk in mutual funds
    25. Banking and PSU Debt Fund
    26. Credit Risk Funds
    27. GILT Funds
    28. Bond Financial Meaning With Examples and 5 types of bonds explained
    29. YTM Yield to Maturity definition and how to calculate
    30. Accrued Interest Definition and Example how to calculate
    31. Active vs Passive Investing for Better Return
    32. What Are Arbitrage Funds? · ‎Example of Arbitrage Fund
    33. mutual fund terms top 10 jargons to know before investing
    34. CAGR how to calcullate Compound Annual Growth Rate with formula
    35. Rolling Return Analyzing Mutual Fund Performance Over Time
    36. Expense Ratio What Is this fee And Why Does It Matter with examples
    37. Direct vs Regular Mutual Fund
    38. Benchmark in Mutual What It Is, Types, and How to Use Them
    39. Mutual Fund Risk Exploring Beta, Alpha, and Standard Deviation
    40. sortino ratio and Capture Ratios uses in Evaluating Mutual Fund Performance and Risk
    41. Mutual Fund Portfolio Guide for Financial success
    42. How to choose the best Mutual Fund for Your Portfolio by Evaluating Risk and Objectives
    43. Mutual Fund for beginners cheat sheet for Financial Success
    44. Smart Beta etf Exploring the Factors that Drive Return
    45. Asset Allocation and Diversification to Build a Balanced Portfolio
    46. Investment Vehicles Exploring the Evolution From Mutual Funds to ETFs
    47. GDP to Market Cap Ratio: Exploring the Link between Macroeconomics and Investments
    48. personal finance guide for Long-Term Success by Taking Control of Your Finances
    49. Personal finance Guide to Optimizing Your Investments and Achieving Your Financial Goals
Marketopedia / Importance of Personal Finance / Direct vs Regular Mutual Fund

As a child in Bangalore during the 90s, Vadilal, Dollops, Kwality and Joy Ice Cream were familiar brands. The one I particularly liked was Joy because the ice cream factory was only half a kilometre from my house.

The small factory had a store out front, where my parents often sent me to pick up chocolate-coated ice cream bars. For just Rs.14/-, we got the same treat that would usually cost Rs.18/- at Anu stores, which is still around a kilometre away! Even if they weren’t treating us to ice cream, they were pleased with the amount of money they were able to save. Everyone was satisfied in the end!

Good old days 🙂

What do you suppose is the reason the factory was selling the ice cream for Rs.14 while Anu stores charged Rs.18?

Well, Anu stores needed an incentive to sell Joy ice cream, so the company marked up the price to include this. Therefore, the choco bar was sold at Rs.18/- – providing a reason for owners to stock it.

At the factor’s store, there is no motivation for Joy Ice Cream since the organisation profits equally from offering their item straightforwardly to the client at Rs.14/-.

I suppose this is a simple business model to understand.

Same goes with Mutual Funds.

You can choose to buy Mutual Funds in two ways –

  •       From the AMC directly
  •       Via a distributor

When you purchase a mutual fund straight from the AMC, it is known as a ‘Direct’ transaction. This is similar to buying ice cream from the manufacturer’s own retail outlet.

On the other hand, investing in a mutual fund through a distributor is similar to obtaining your ice cream from Anu stores.

In order to motivate distributors to sell regular mutual funds, AMCs add a markup to the TER, converting it into additional revenue. Consequently, when looking at any specific fund, the TER of the regular version will always be higher than that of the direct version.

This brings us to a noteworthy point – each mutual fund scheme comes in two plans.

  •       Direct Plan
  •       Regular Plan

The snapshot below, taken from the HDFC AMC website, reveals that while all else remains constant, the TER has shifted.

Looking at the HDFC Top 100 Fund (Growth), two variants can be seen: the direct plan, which is the first in this list and clearly specified as such, and the regular plan, which, while not explicitly stated by the AMC, is implied.

The TER for both these funds is different. Here is the snapshot –

The TER for Direct stands at 1.28%, compared to the Regular option’s 1.78%. The extra 0.5% in the latter is to ensure the distributor receives proper pay for marketing the Mutual Fund product.

It is imperative to comprehend that you, the investor, are paying the TER to the AMC and distributor.

When you buy directly from AMC, you can avoid distributor commission and thus enjoy lower TER. Lower TER means higher returns for you.

At this point, it is clear that the TER for regular funds is higher than their  direct counterparts. Fund management, strategy, portfolio makeup, risk profile and other factors are the same; however, the TER or expense ratio differs.

The TER of a mutual fund will vary depending on the AMC and its funds. This incentivizes mutual fund agents or distributors to offer these funds, meaning they may be more likely to suggest them to their clients. You may have questions about this;

  •       Who are these ‘MF agents or distributors’ trying to convince you to buy regular plans?
  •       Why would anyone opt for regular funds given that these have higher TER?
  •       If the two funds are alike, why is there a discrepancy in the NAV of the direct fund and that of the regular fund (as per the snapshot presented)?

MF agents could be your local bank manager, your annoying Sunday morning visitor trying to peddle a ‘financial scheme’, or even an online website. At such places, you can purchase mutual funds on your own.

No matter who the distributor is, it is important to be mindful that when purchasing a standard MF, you will be paying a higher TER.

Would it be more sensible to invest in a plan with a lower TER, regardless of the cost?

Well, no.

If you lack knowledge of Mutual fund investments, it pays to speak with an advisor. This professional can provide insight, track markets, monitor MF performance and rebalance as necessary. As such, it is only right to reward the advisor for their work by purchasing a regular Mutual Fund.

If you have an understanding of Mutual funds, then opt for a direct fund to help save on costs; it would be the most suitable choice.

This should shed some light on what these distributors are and why someone should or shouldn’t go for regular funds.

The most asked query is possibly why the NAV of direct funds comes out higher than that of ordinary funds.

Confusion arises from the NAV of the regular fund being cheaper, so why spend more on the direct fund when its NAV is higher?

For example, look at the NAVs for HDFC Top 100 fund –

  •       Direct plan NAV is 460.5
  •       Regular plan NAV is 438.4

The difference between the two funds is almost Rs.22/- per unit, meaning it’s understandable to opt for the cheaper one.

The issue lies in how one looks at the NAV. If perceived as a cost of accessing the mutual fund, then the NAV of a regular plan appears more pocket-friendly and therefore may seem like an intelligent choice to opt for it.

It is essential for you to look past the NAV as an asset price, and rather think of it as a value of an asset. Consequently, a regular plan can be less rewarding when compared to the direct plan. Understandably, the NAV means ‘Net Asset Value’ instead of ‘Net Asset Price’. I trust that this subtle difference made sense to you.

Consider NAV as the current value of your obtained asset.

In the subsequent chapter, we will further explore a few mutual fund metrics.