How Direct and Regular Mutual Funds Differ

It is hard to digest the fact that, even though Direct and Regular Mutual funds have similar investment objectives, there is a difference when it comes to returns. This article will detail about how the direct and regular mutual funds are similar in terms of portfolio and how do they differ when it comes to returns.

Does direct and regular mutual fund of specific scheme with similar investment objectives perform differently?

No, performance wise, both regular and direct mutual fund have same investment objective. This could be well elaborated by the similarities between direct and regular mutual funds.

Similarities between Direct And Regular Mutual Funds

They have same exit load, asset allocation pattern, portfolio of investments. And hence they perform equally. It is just that in regular funds you loose the extra commission to the distributors in contrast to the direct mutual funds. 

Differences between Direct and Regular Mutual Funds

If the regular and direct mutual funds doesn’t differ by their investment objectives, portfolio, asset allocation patterns and exit loads, then how do direct funds can offer more returns than regular funds?

The main advantage of Direct Mutual Funds over Regular Mutual Funds is there is no commission. Also the Total Expense Ratio (TER) is comparatively less in direct funds in contrast to regular funds. TER affects the returns obtained through a mutual fund. As TER is less in direct funds and more in regular funds, direct funds offer more returns. Because of these reasons the NAV (Net Asset Value) of the direct schemes is different and mostly lower than regular funds.

So, as a budding investor, the basic things to notice on how direct mutual funds differ from regular mutual funds are as follows.

Direct mutual funds has, 

  1. Higher returns than regular mutual funds
  2. No Distributor Code associated with the Folio
  3. No distributor commission to be paid by AMC
  4. Lower Total Expense Ratio compared to regular funds

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