Regular vs direct mutual funds: Higher expense ratio isn’t the only drawback; what else investors should know

Regular plans incur higher fees due to agent commissions, while direct plans are managed by investors. But that should not be the only factor to choose a plan, here's what else you should know.

Regular and direct mutual fund plans invest in the same underlying securities with the same investment objective and fund manager. The key difference is that the fund in a regular plan is managed by agents or fund advisors, while in direct plans, the fund is managed directly by the investor.

This also makes the expense ratio of regular plans higher than that of direct plans as agents charge commission of around 0.5% to 1.5%, which is paid by the investor. This difference may appear small, but even a gap of around 1% can have a major impact on returns over a long investment horizon.

However, the higher expense ratio is not the only drawback investors should be aware of when choosing between regular and direct mutual fund plans. Here's what else investors need to know.

Potential conflict of interest

In regular plans, there is the possibility of conflict of interest because the distributor is also compensated by the product manufacturer, said Harendra Zatakia, a Sebi RIA and the founder of Wealth Aligned Financial Advisory.

However, that does not mean the recommendation is necessarily wrong or unsuitable. The investor should understand the economic incentive and how the intermediary is compensated, he added.

Zatakia advised investors to ask two simple questions before opting for a regular mutual fund plan: “Who is paying for the advice I am receiving and is this fund the best solution for my objective, or simply the product being recommended?”

This essentially means that the objective should not be to assume that commission-based advice is wrong, but to ensure that product selection is driven by suitability rather than compensation.

How much more does a regular plan cost?