Major Advantages of Direct Funds

Updated on: Jan 13th, 2022 - 6:05:30 AM

4 min read

social iconssocial iconssocial iconssocial icons

Effective from January 2013, as per the mandate of the Securities and Exchange Board of India (SEBI), the fund houses or asset management companies (AMCs) have classified mutual funds into two categories, and they are regular funds and direct funds.

A direct mutual fund is a scheme that investors directly purchase from the fund house or asset management company (AMC). There is no third party, agent, or distributor involved between the investors and fund houses. A regular mutual fund is sold through a third party, agent, or distributor. The AMC pays a commission or brokerage to the agent when they manage to find investors.

Therefore, the expense ratio of regular funds would be higher when compared to direct funds. However, the asset allocation, investment objective, and the fund manager(s) would be the same for regular and direct funds. Here are the four major advantages of investing in direct funds:

Low Expense Ratio

As there is no third party involved between the investors and fund houses, the expense ratio of direct funds would be lower than that of regular funds. In regular funds, the AMCs pay the agents a commission for their services, and they recover this through expense ratio. Though the difference in the expense ratio between regular and direct funds might seem minimal, over time, the difference would grow to a significant sum.

The Net Asset Value (NAV) of a mutual fund is the ratio of the value of the total assets in its portfolio to the number of outstanding units. NAV = (Value of the assets owned)/(outstanding units) The assets owned by a mutual fund can be equity shares of various companies, debt instruments such as bonds and treasury bills, and cash instruments. As there are no brokerage charges imposed on the investors in case of direct funds, the NAV of direct funds would be higher than that of regular funds.

High Returns

Since there is no brokerage or commission involved in direct funds, the expense ratio of direct funds would be lower than that of regular funds. Although the difference in the returns between the regular and direct funds might not look significant, it would be massive when you invest with a long-term horizon.

Here’s an example: Consider investing Rs 15,000 a month in SIP for ten years in both regular and direct plans of a fund house. Let’s assume that the returns offered by the direct and regular funds are 12% and 11% respectively. For regular funds, the AMC pays a commission of 1% to the agent. The following table shows the amount accumulated at the time of redemption:

ParameterDirect FundRegular FundDifference
Monthly SIP amountRs 15,000Rs 15,0000
Investment Tenure10 years10 years0
Returns 12%11%1%
Amount accumulated at the time of redemptionRs 34.51 lakhRs 32.55 lakhRs 1.96 lakh

No Conflict of Interest

After knowing the advantages of investing in direct funds over regular funds, it’s only wise to invest in direct funds. You can save on paying unnecessary commissions and keep the expense ratio on the lower side. Also, you would get higher returns on direct funds when compared to that of regular funds.

inline CTA
Invest in Direct Mutual Funds
Save taxes upto Rs 46,800, 0% commission

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use


ISO 27001

Data Center


SSL Certified Site

128-bit encryption