Direct or regular mutual fund: Before investing in mutual funds, most investors focus on returns, past performance and fund categories. However, there is one aspect that often goes unnoticed, which is cost — specifically, the difference between direct and regular mutual fund plans. Over a long horizon of 20 years, this seemingly minor difference can quietly erode your accumulated wealth to a significant extent.
Based on data available from Value Research, we analysed approximately 82 equity funds (including both regular and direct plans) with a track record spanning more than 20 years.
Among 82 equity funds with over 20 years of history, 48 have delivered annualised returns above 12 per cent, according to Value Research’s data — using 12 per cent as a benchmark for long-term projections.
What is the real difference between direct and regular plans?
Direct and Regular mutual fund plans invest in the same portfolio and are managed by the same fund manager. The only difference between them lies in the cost.
A Regular Plan includes a commission for the distributor or advisor, which is embedded within the expense ratio. A Direct Plan does not include this commission, making it more cost-effective.
Typically, the difference in the expense ratio ranges between 0.5 percent and 1 percent annually.
How does an expense ratio reduce your actual returns?
Let’s understand this with a simple assumption:
Total return from the fund: 10 per cent per annum
Expense ratio of the Regular Plan: 1.5 per cent — Net return: 8.5 per cent
Expense ratio of the Direct Plan: 0.5 per cent — Net return: 9.5 per cent
This 1 per cent difference in net returns is entirely due to expenses.
20-year return comparison — Direct vs regular
Investment – Rs 1,00,000 (lump sum)
Gross return – 10 per cent annually
| Regular Plan | Direct Plan | Difference | |
| Expense Ratio | 1.5% | 0.5% | 1% |
| Net Return | 8.5% | 9.5% | +1% |
| Value after 20 years | Rs 511205 | Rs 614161 | Rs 102956 loss |
Even on a small investment of Rs 1 lakh, an investor loses more than Rs 1 lakh due to high costs.
SIP investors lose even more due to compounding.
The impact of this is even sharper for SIP investors, as investments are made on a regular basis.
Investment – SIP Rs 10,000 for 20 years
Return assumption – 12 per cent
Expense ratio – 1 per cent (direct) vs 2 per cent (regular)
| Time Period | Difference in Corpus |
| 5 years | Rs 19,000 |
| 10 years | Rs 1.1 lakh |
| 20 years | Rs 9.2 lakh |
The gap widens rapidly as time increases due to compounding.
The direct vs regular mutual fund debate is less about performance and more about cost efficiency. A small difference in expense ratio — often ignored — can lead to a Rs 10–15 lakh erosion in wealth over 20 years on larger investments.
For long-term investors, especially those comfortable managing their portfolios, cutting costs through direct plans can be one of the simplest ways to boost returns without taking extra risk.
Is the regular plan cost more?
A regular plan includes a distributor commission, which typically ranges between 0.5 per cent and 1.5 per cent annually. This is embedded within the expense ratio itself; therefore, investors do not pay it directly—yet they ultimately bear this cost in the form of lower returns.
However, it is not necessary that a direct plan is always better.
From another perspective, a crucial point emerges — in reality, the cost differential often ranges from 0.4 per cent to 0.6 per cent — not always a full 1 per cent — and in the context of regular plans, this additional cost can be viewed as a fee for services rendered.
These services encompass financial planning, fund selection, portfolio monitoring, and providing sound advice during periods of market volatility. And this last point is of paramount importance.
Many investors end up losing far more money—relative to the expense ratio—due to panic selling or chasing after higher returns.
Therefore, if an advisor helps you stay invested during a market downturn or prevents you from making erroneous decisions, that additional cost of 0.5 per cent can actually save you far more money than it costs you.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
