Direct vs Regular Mutual Funds: Comparing The Returns Of Top Funds

Direct mutual funds and regular mutual funds are variations of the same mutual fund scheme. However, direct schemes are known to generate higher returns than regular schemes. 

The difference in returns has made direct funds a hot favourite among amateur investors. But the devil lies in the details, as we’ll see through the course of this blog. 

Why Are The Returns Different For Direct & Regular Funds?

Direct funds have a marginally lower expense ratio than regular funds. That’s because AMCs don’t have to pay a commission fee to third party distributors. 

The commission fee is added to the expense ratio in regular funds that bloats the expense ratio. Since the expense ratio is low for direct funds, the NAV tends to be higher than regular funds. 

Everything apart from the expense ratio and NAV of a direct fund mirrors its regular scheme variant including the fund management team and portfolio. 

If the mutual fund’s value grows, so will the returns generated by both the direct and regular variations of the scheme. However, direct funds will generate slightly better returns because of the lower expense ratio.  

This doesn't necessarily mean buying direct equity funds is a better idea. There is the question of picking funds and when buying direct funds, you won't get any advisory on which fund is right for your goals. You can consult a Cube Wealth Coach or download the Cube Wealth App.

After all, you cannot time the market. You may be lucky once in a while when selecting direct funds. But do you really want to leave this to luck? 

Either way, let’s compare the returns generated by direct and regular mutual funds. We’ll use the direct and regular variations of the same mutual funds to keep things simple. 

1. Equity Funds

We’ll use HDFC Flexi Cap Fund for the sake of comparison. The regular scheme was introduced in 1995 and the direct scheme in 2013.

2. Debt Funds

For debt funds, we’ll compare the returns and expense ratio of ICICI Prudential Corporate Bond Fund’s direct and regular schemes. The regular scheme was introduced in 2009 and the direct scheme in 2013.

3. International Funds

Edelweiss Greater China Equity Off-shore Fund is a Fund of Fund scheme that was introduced in 2009. The direct variation was introduced in 2013.

Fun fact: International funds are taxed like debt funds even though they invest in equity (stocks).

Are The Returns Generated By Direct Funds Worth It?

You must be wondering how the mutual funds used above were selected. They are handpicked by Cube’s mutual fund advisor Wealth First who’ve been outperforming the market for the past decade. 

Investors who buy direct funds do not have the luxury of wealth advisory. They’ll have to pick mutual funds on their own. This can be a daunting task, broadly speaking, because of two reasons:

• You’ll have to rummage through 1000+ scheme variations
• It’ll take a lot of dedicated time and research
  

Furthermore, the returns generated by direct funds are only slightly better than regular funds in most instances. And once you buy a direct fund, you must also monitor the market to know when to sell it. 

Thus, you must weigh these arguments to know if the extra returns are worth it:

• The extra returns are worth it and I can spend multiple hours on research every day to buy and sell mutual funds - Direct
• I’m a busy professional so the research is tedious and there are just too many options to choose from - Regular

FAQs

1. How does the expense ratio impact returns in direct and regular mutual funds?

Ans. The expense ratio is the annual fee that a mutual fund charges its investors. A lower expense ratio in direct funds typically results in higher returns compared to regular funds, as investors pay fewer fees.

2. What are the advantages of investing in direct mutual funds?

Ans. Investing in direct mutual funds can offer higher returns due to lower expense ratios. Additionally, investors often have more control over their investments and can make informed decisions without the influence of intermediaries.

3. Are there any downsides to investing in direct mutual funds?

Ans. One of the potential downsides is that investors might need to handle their investments independently, as they don't have the guidance of financial intermediaries that regular funds offer. This could be a disadvantage for those who prefer professional advice.

4. How can I switch from regular mutual funds to direct mutual funds, and is it a straightforward process?

Ans. It's usually possible to switch from regular to direct mutual funds within the same fund house. The process typically involves submitting a request to the fund house and may have tax implications, so it's advisable to consult with a financial advisor.

Conclusion

The choice between direct and regular mutual funds plays a significant role in an investor's overall returns. In comparing the returns of these two types of funds, it becomes evident that direct mutual funds tend to offer higher returns due to their lower expense ratios.  You can consult a Cube Wealth Coach or download the Cube Wealth App.

Direct mutual funds empower investors to take more control over their investments and reduce the impact of fees on their returns. However, this independence also comes with the responsibility of making informed investment decisions.

Watch this video to know why you shouldn’t pick mutual funds on your own

‍Note: All facts & figures are correct as of 06-08-2021 and have been obtained from publicly available sources on the internet. 

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