Watch out for the hidden costs in mutual funds - Direct funds vs Regular funds

What is a Regular Fund?

Regular Mutual funds are funds that you buy indirectly through and advisor, broker, distributor etc. The mutual fund pays a commission to the advisor for getting the sale.

What is a Direct Fund?

Direct Mutual Funds are funds that you buy where you don’t pay any brokerage fee. Usually this would mean you have to research the fund on your own and either invest directly or through zero brokerage platforms

Regular plan sale commission

Where is the commission getting paid from? – A higher expense ratio

These commissions are built into the expense ratio that is levied every year by your fund house. See below a snapshot of some of the expense ratios of direct plans and regular plans.

Fund Name

Direct Plan Expense Ratio

Regular Plan Expense Ratio

Difference

Axis Long Term Equity Fund

0.93%

1.74%

0.81%

SBI Focused Equity Fund

0.85%

1.99%

1.14%

Axis Bluechip Fund

0.44%

1.79%

1.35%

UTI Equity Fund

1.41%

1.85%

0.44%


You get lower returns on regular plans vs direct plans

I took this snapshot of some random funds on 22 Jun. Regular plan expense ratios are almost always higher than your direct plan. It is higher by up to 1% in some cases. Direct plans are better for you. The expense ratio is deducted from your funds annually automatically and in case of regular plans a portion of the difference goes as commission for your advisor every year. Depending on the corpus you have invested with your advisor, you can calculate what cut your advisor is making. This eats away a portion of your returns every year. Whether or not you make a profit, your advisor will definitely will.

Are your financial interests at the heart of the financial advisor suggesting a regular plan?

You would have noticed is that the premium you pay on a regular plan vs a direct plan varies for different funds. The advisor may have a higher incentive to sell you a fund where he/she has a higher % commission. While most advisors may still look at for your best interests, there will always be few bad apples who may not.

Personally, I have invested in direct mutual funds for this particular reason and have engaged a FEE ONLY financial planner.


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