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.
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.
The following are the features of direct 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.
The following table shows the differences between direct funds and regular funds.
|Parameter||Direct Funds||Regular Funds|
|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|