Do 'direct' mutual funds build more wealth than 'regular' ones?

I am aware that 'direct' plans charge a lower 'expense' than 'regular' plans and hence are likely to give more returns. But how much difference will it make in your wealth? - Amit

Since 'direct' mutual funds allow investors to put their money directly into mutual funds and eliminate the need for middlepersons (brokers, agents and advisors), they charge lower expense fees than 'regular' mutual funds. (For the uninitiated, every mutual fund has a 'regular' and a 'direct' variant.)

As of January 2024, the median (read average) difference between the expense ratio of a 'regular' and a 'direct' plan of a flexi-cap fund is 1.25 per cent. So, if a direct plan generates an annual 12 per cent return, the regular plan generates 10.75 per cent.

How much difference does this eventually make?

1.25 per cent doesn't seem like a big difference.

However, the difference is meaningful if you are invested for the long term. The longer you stay invested, the starker the difference. The more handsome 'direct' mutual funds appear.

For instance, a direct plan would help you accumulate Rs 14,000 more if you did a monthly SIP of Rs 5,000 for five years.

That difference would magnify to Rs 42.5 lakh over a 30-year timeframe.

In other words, if you did a Rs 5,000 monthly SIP for 30 years in a 'direct' mutual fund, it would help you generate Rs 42.5 lakh more (32 per cent higher) than what you have earned by investing in a 'regular' fund!

What you should do

• Direct plans help you build more wealth.
  
• However, opt for direct plans if you know how to pick mutual funds and don't get anxious about market ups and downs.
  
• If you don't know much about investing and mutual funds, take the help of brokers and advisors to invest in a 'regular' fund, at least initially.
  
• That said, you can also subscribe to Value Research Premium for a small fee and invest in recommended 'direct' mutual funds to build wealth faster.

Suggested read: Is it worth switching from regular to direct funds?

This article was originally published on March 06, 2024.