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Mutual funds come in two variants as per the mandate of the Securities and Exchange Board of India (SEBI), effective from January 2013. The two variants of mutual funds are direct funds and regular funds.

1.What are direct funds?

Direct funds are those funds for which the fund house don’t charge the distributor expenses, transaction charges, or trail fees. Hence, the NAV of direct funds would be higher than that of the regular mutual funds. Investors should note that the investment objective and asset allocation of regular and direct funds would be the same.

The asset management companies (AMCs) were offering direct mutual funds even before the SEBI’s mandate to classify direct and regular funds. A direct fund investment was made directly into the distributor plan and was tracked with a solitary net asset value (NAV). Therefore, the investors were purchasing fund units based on the NAV of the distributor plan. This changed when the market regulator decided to introduce direct plans in January 2013.

2.Features of direct funds

The following are the features of direct funds:

  • Investors need not depend on any intermediaries to invest.
  • Investment can be made, both online and offline.
  • The fund house will not levy the distributor fee, as there is no intermediary. Hence, the expense ratio of direct funds would be lower than regular funds.
  • There are no transaction charges.
  • The direct funds are denoted by ‘direct’ in their description.

3.What are regular funds?

Regular funds are those mutual fund plans that are offered by the mutual fund distribution companies (intermediaries). The fund house or the AMC will pay commissions to the distributor/intermediary. The fund recovers the commission it pays to the intermediary through the expense ratio levied on the investors. Therefore, the expense ratio of regular funds would be higher than that of the direct funds.

4.Advantages of investing in direct funds

  • As mentioned earlier, the expense ratio of direct funds would be lower.
  • There are no transaction charges levied on investors.
  • No need to involve a third party for making investments in direct funds.
  • Direct funds offer higher returns than regular funds.
  • NAV of direct funds is higher than regular funds.

5.How are direct funds different from regular funds?

The following table shows the differences between direct funds and regular funds.

 

Parameter

Direct Funds

Regular Funds

NAV

Higher

Lower

Returns

Higher

Lower

Expense Ratio

Lower

Higher

Transaction Charges

No

Yes

Advice

Not available

Available

Market Analysis

Done by self

Done by the agent (expert)

The difference in the returns offered by direct funds and regular funds may not seem to be significant, but over time, that difference will be huge.

The following table shows the difference in the returns offered by the direct and regular funds:

 

Parameter

Direct Funds

Regular Funds

Difference

Amount invested (monthly SIP)

Rs 10,000

Rs 10,000

0

Duration of investment

5 years

5 years

0

5-year return (assumption)

15%

13.9%

1.1%

Amount accumulated at the time of redemption

Rs 8,96,817

Rs 8,69,573

Rs 27,244

 

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