Direct vs Regular Mutual Funds: Are Hidden Broker Fees Cutting Into Your Returns?

Welcome community💓

I'm sure most if not all digital and finance savvy beginner investor already knows this but for those seeking clarity, imagine mutual funds as shopping for groceries: 

• Buying direct is like going straight to a farmers’ market - more effort but better value.
• Buying regular is like using a personal shopper - they find, sort, and deliver groceries but charge a fee.

Ultimately, the choice depends on an investor’s confidence and investment style.  

• Direct plans are ideal for those who value active control, understands a bit about the stock market, have self-drive to explore / learn more as they go and want to save on commission(fees), while regular plans suit those who want expert help and a guided experience - even if it costs a bit more.

Commission difference between Direct V/S Regular Fund?

• For simplicity, I've taken a sample example - Tata small cap fund - Direct growth.
• This fund was launched on Nov 2018.

• Reference factsheet - Tata Small Cap Fund - Direct, Growth, Nav, Returns - Tata Mutual Fund
• Since inception the fund has returned an annualized return (CAGR) of 28.16% for the direct growth plan.

• The expense ratio of Direct growth plan = 0.33% and Regular plan = 1.66%
• Hence, for Direct growth plan annualized return (CAGR) = 28.16% but for Regular plan annualized return (CAGR) would be = 28.16% - 1.66% = 26.5% since inception.
• Now , let's compute the numbers for an assumed SIP of Rs 5000 per month for a period of 7 years (since inception).

 

Direct Growth fund returns - The Corpus for a SIP of Rs 5000 for 7 years in this fund is projected to become Rs 11,43,241

 

 

Regular Fund returns - The Corpus for a SIP of Rs 5000 for 7 years in this fund is projected to become Rs 10,78,325

 

 

 

Difference in returns (which is commission paid to the distributor) = Rs 11,43,241 - Rs 10,78,325 = Rs 64,916 (that's a lot of money😛)

Where can you buy Direct Growth Funds -

• Directly from Asset management companies e.g. Tata as in this sample example , HDFC Mutual fund et al ., MF Central , Kuvera and many more.

Where can you buy Regular Funds -

• Through your Mutual Fund Distributor, ICICI Direct, Upstox and many such platforms.

Final Summary - 

Feature	Direct Mutual Fund	Regular Mutual Fund
Purchase Method	Directly from the AMC (fund house) & apps offering Direct plans.	Through a distributor & brokers.
Expense Ratio	Lower expense ratio(commission) or distribution costs.	Higher, includes commission to intermediaries.
Returns	Higher long-term returns due to lower costs.	Slightly lower returns owing to higher expenses.
Advice/Guidance	Self-managed, requires investor knowledge.	Professional advice and support available.
Suited For	Experienced, proactive investors.	Beginners or those preferring guidance.

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Disclaimer -

This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy, sell, or hold any financial product. The author is not a SEBI-registered advisor and all views expressed are personal opinions. Please consult a registered financial advisor before making any investment decisions. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.