When investing in a mutual fund, one of the first decisions you will face is whether to choose the direct plan or the regular plan. While both plans invest in the same underlying scheme and are managed by the same fund manager, they differ in how they are accessed and what they cost.
Understanding the difference between direct and regular mutual funds is important for making informed investment choices. In this article, we explain the key distinctions, explore their long-term impact using examples, and show how tools like an SWP calculator can help you plan withdrawals post-investment.
What is a mutual fund?
A mutual fund is a professionally managed investment product that pools money from several investors and invests in a portfolio of equities, debt instruments, or both. Investors receive units representing their share in the fund’s portfolio, and the value of these units fluctuates daily based on the performance of the underlying assets.
Mutual funds are offered in two plan variants—direct and regular. Though both plans belong to the same scheme, the difference lies in how you invest and what you pay.
What are direct mutual funds?
A direct mutual fund is one where you invest directly with the fund house, without involving any intermediaries. Because there is no commission paid to a third party, the expense ratio in a direct plan is lower.
Features of direct mutual funds:
- Lower expense ratio
- Higher NAV (Net Asset Value) compared to regular plans
- Requires investors to evaluate and choose schemes independently
- Available through fund house websites or registered online platforms
Direct plans are suitable for investors who are comfortable making investment decisions on their own or with the help of a registered investment advisor.
What are regular mutual funds?
A regular mutual fund is accessed through intermediaries such as brokers, agents, or relationship managers. These intermediaries are compensated through commissions, which are included in the fund’s expense ratio.
Features of regular mutual funds:
- Higher expense ratio due to distributor commission
- Lower NAV compared to direct plans
- Offers access to advice and services through the intermediary
- Suitable for investors seeking handholding or ongoing service support
Illustration
Let us take an example to understand the impact of choosing a direct plan versus a regular plan.
Assume a hypothetical investor named Priya invests Rs 5,000 per month in a mutual fund via SIP for 20 years.
- If the regular plan offers a potential return of 11% per annum, the estimated corpus is Rs 40.7 lakh.
- If the direct plan of the same fund offers a potential return of 12% per annum (due to a lower expense ratio), the estimated corpus is Rs 46 lakh.
That’s a difference of nearly Rs 5.3 lakh over the investment period. While the difference in annual returns may seem small, the long-term compounding effect can significantly influence your wealth creation. However, please remember that these returns are not guaranteed, but are just projections.
Planning withdrawals using an SWP calculator
After accumulating wealth through mutual funds, many investors look for a way to generate regular income during retirement or other life phases. This is where a Systematic Withdrawal Plan (SWP) can be helpful.
An SWP allows you to withdraw a fixed amount from your mutual fund at regular intervals while the remaining amount continues to stay invested.
An SWP calculator can help estimate:
- The duration your investment will last based on withdrawal amount and return assumption
- The monthly cash flow you can expect
- How your corpus may potentially grow or decline over time
Which one should you pick?
Your choice between direct and regular mutual funds depends on several factors:
Choose direct mutual funds if:
- You are confident in researching and selecting mutual fund schemes
- You prefer lower costs and higher transparency
- You already work with a registered financial planner
Choose regular mutual funds if:
- You value ongoing guidance from a distributor
- You are new to mutual fund investing and want assistance
- You prefer a human point of contact to discuss financial matters
It is not about one being better than the other, but about which structure supports your decision-making and comfort level.
Important tax considerations
Regardless of whether you invest in a direct or regular mutual fund, the tax rules are the same:
- Equity funds – Long-term capital gains (above Rs 1.25 lakh) are taxed at 12.5%
- Debt funds – Gains are taxed as per your income slab, regardless of holding periodÂ
Tax implications should be factored into both accumulation and withdrawal strategies. Consult a tax advisor for personalised guidance based on current rules.
Final thoughts
Both direct and regular mutual funds serve the same investment objective but differ in how they are accessed and the costs involved. Choosing the right plan depends on your ability to manage investments independently or your preference for assisted investing.
When combined with strategic tools like an SWP calculator, your choice of plan—whether direct or regular—can be integrated into a broader financial roadmap. It is advisable to consult with a financial planner or investment advisor before making any investment decisions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
