Direct vs Regular mutual funds — the difference that costs lakhs over time

If you have invested in mutual funds through your bank, a broker, or a financial app that earns commissions, there is a very good chance you are in the regular plan. Most investors have no idea this distinction exists, let alone what it costs them. This post explains the direct vs regular difference clearly, shows you exactly how the numbers play out over time, and tells you when a regular plan might actually be a reasonable choice — and when it is not.

01 — What Direct and Regular Plans Are

Every mutual fund in India offers two variants of the same scheme:

Regular Plan

The regular plan is sold through distributors — which includes banks, brokers, financial advisors, apps, and any intermediary registered with AMFI. The fund house pays a trailing commission to the distributor every year, as a percentage of the AUM the distributor has brought to the fund. This commission is embedded in the fund's expense ratio. You pay it without receiving an explicit invoice.

Direct Plan

The direct plan was introduced by SEBI in January 2013 specifically to give investors a way to invest without paying distributor commission. In a direct plan, you invest directly with the fund house — through their website, MF Central, or SEBI-registered investment advisors (RIAs) who charge you directly rather than earning a commission.

Because there is no commission payout, the direct plan has a lower expense ratio — which translates into a higher NAV compared to the regular plan of the same fund, compounding over time.

Both plans invest in exactly the same portfolio, managed by exactly the same fund manager, following exactly the same strategy. The only difference is the cost structure.

02 — Who Gets the Commission in Regular Plans

This is worth being explicit about because it is frequently misunderstood.

When you invest in a regular plan, the fund house deducts the distributor commission from the fund's NAV every day. That commission goes to whoever sold you the fund — your bank relationship manager, the distributor's firm, or the app you used.

The commission typically ranges from 0.5% to 1.5% per year depending on the fund category:

This commission is paid every year as long as you remain invested. The distributor has no obligation to monitor your portfolio, review your goals, or contact you when the fund underperforms. They receive the commission simply for having facilitated your original investment.

03 — NAV Difference: How It Compounds Over Time

Because the direct plan has a lower expense ratio, it starts with the same NAV as regular on day one (January 1, 2013, when SEBI introduced direct plans) but grows faster each year. The gap in NAV compounds over time.

Consider a specific example. For a popular large cap fund where the regular plan expense ratio is 1.5% and the direct plan is 0.9% (a difference of 0.6%):

(Assumes 15% gross annual returns for illustration; 0.6% TER difference applied annually.)

Now translate this NAV difference into portfolio rupees. For a ₹10,000/month SIP over 20 years:

For a higher-cost fund (2.0% regular vs 1.0% direct, a 1% difference):

Myth: "Regular and direct plans are basically the same — the difference is too small to worry about."

The numbers above demonstrate conclusively that the difference is not small. ₹9–16 lakhs on a ₹24 lakh investment is not a rounding error. It is a structurally guaranteed wealth transfer from your retirement corpus to your distributor — every year, invisibly, regardless of whether the fund performs or not.

04 — When Regular Plan Might Be a Reasonable Choice

This post is not arguing that distributors or advisors should not be paid. Genuine financial advice has real value. The question is whether you are getting advice commensurate with what you are paying.

A regular plan makes reasonable sense when:

• You receive genuine, ongoing financial advice: Your advisor actively reviews your portfolio, rebalances when needed, calls you during market crashes to prevent panic selling, and helps you stay aligned with your goals. This kind of behavioral coaching has documented value that can exceed the cost of commissions.
• You are a first-time investor with no financial knowledge: The guidance and handholding during the initial years may be worth the cost, especially if it prevents expensive emotional mistakes.
• The advisor is SEBI-registered and you have a formal engagement: This provides accountability and a fiduciary obligation to act in your interest.

A regular plan does not make sense when:

• You invested through a bank's wealth management desk and have never received a review call
• You used an app or online platform that earns a commission but provides no personalized advice
• You are comfortable investing directly and managing your own portfolio with basic financial literacy

05 — How to Check Which Plan You Hold and How to Switch

Checking Your Current Plan

1. Log in to MF Central (mfcentral.com) using your PAN and OTP — this shows all your mutual fund holdings across all AMCs in one place
2. Look at the scheme name — it will say "Direct" or "Regular" in the fund name
3. Check the expense ratio in the fund factsheet — a noticeably higher ratio (above 1% for large cap) typically indicates a regular plan

Switching From Regular to Direct

Important: Switching from regular to direct is treated as a redemption followed by a fresh investment. This means:

• If the investment has appreciated, capital gains tax applies at the time of switch
• Equity funds held for more than 12 months: Long-term capital gains (LTCG) tax at 12.5% above ₹1.25 lakh annually
• Equity funds held for less than 12 months: Short-term capital gains (STCG) tax at 20%
• Debt fund gains: Taxed as per your income tax slab

The optimal approach is to stop fresh SIPs in the regular plan immediately (redirect to direct plan) and allow existing regular plan units to be switched gradually — prioritising units that have held for over 12 months to benefit from LTCG rates, and ideally switching units when total annual gains are within the ₹1.25 lakh LTCG exemption limit.

For new investments, switch to direct immediately — there is no tax event for switching before any gains have accrued.

06 — Where to Invest in Direct Plans

Bottom Line

Direct and regular plans are the same fund with one crucial difference — cost. That cost difference, silently compounding over 15–20 years, can add up to ₹10–20 lakhs on a modest SIP. If you are invested in regular plans without receiving genuine, ongoing financial advice, you are paying for a service you are not receiving. Check your plan type today, redirect future SIPs to direct, and plan a tax-efficient migration of existing holdings. This single change, requiring no market timing and no fund selection skill, can add significant wealth to your retirement corpus.

Disclaimer: This post is for educational purposes only and does not constitute personalised financial advice. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please consult a SEBI-registered financial advisor before making investment decisions.

About the Author

Hariprasath Loganathan NISM-Certified MF Distributor | Foundation Wealth

I am a certified financial expert on Mutual Funds, NPS, and Fixed Deposits. My approach is simple — educate first, plan next. I believe that when you understand why you're investing, you stay committed through market ups and downs. I combine structured financial literacy with personalised, goal-based investment planning.

Educate. Plan. Grow.

📧 hariprazath@gmail.com 📞 +91 9944060203 🌐 https://foundationwealth.in