Direct vs Regular Mutual Fund Plans: The Difference That Compounds

What the two plan types actually are

Every open-ended mutual fund scheme in India is required by SEBI to offer two variants of the same portfolio: a regular plan and a direct plan. Both plans are managed by the same fund manager, hold the same securities in the same proportions, and follow the same investment mandate. The single difference is in the expense ratio — the annual fee deducted from the scheme's assets before the Net Asset Value (NAV) is published each day.

In a regular plan, the expense ratio includes a distributor commission — typically called a trail commission— that the fund house pays to the mutual fund distributor (MFD) or bank that brought the investor to the fund. This commission is not a one-time payment. It is paid as a percentage of the investor's average assets under management (AUM) every year for as long as the investor stays in the fund. Because it is embedded in the expense ratio and deducted before NAV is computed, investors often do not see it as a separate charge — it is invisible in account statements.

In a direct plan, there is no distributor in the chain. The investor transacts directly with the fund house or through a registered investment adviser (RIA) or a direct-plan platform. No trail commission is paid, so the expense ratio is lower by the exact amount of that commission. Everything else — fund manager, portfolio, benchmark, exit load — is identical.

SEBI's January 2013 mandate

Before 1 January 2013, investors in India could not access a mutual fund without a distributor's involvement. Every investment flowed through a distributor or bank branch, and the trail commission was simply part of the industry's cost structure. Many investors were unaware the commission existed because it was never itemised on their account statements.

SEBI's circular dated 22 October 2012 mandated that all existing and new open-ended mutual fund schemes must offer a separate direct plan from 1 January 2013. The circular required that the direct plan carry a lower expense ratio — by at least the amount of the distributor commission — and that it be available to investors who approached the fund house directly, through MF Utility (now MF Central), or through platforms that did not charge a distribution commission.

The effect was immediate for new investments. Existing regular plan investors had to actively switch to access the lower expense ratio, which most did not do initially — both because awareness was low and because the switch itself created a tax event (discussed in a later section). Over the following decade, as direct-plan platforms proliferated and financial literacy improved, the share of direct plan AUM in the Indian mutual fund industry grew substantially. By early 2025, direct plans accounted for approximately 53–55% of the overall mutual fund AUM in India, though retail investor participation in direct plans remained lower than institutional.

How large is the expense ratio gap?

The gap between direct and regular plan expense ratios varies by fund category and by specific fund house. As of the years immediately preceding this article's publication, the following ranges were observed across the industry:

• Actively managed equity funds: the expense ratio gap between direct and regular plans ranged from approximately 0.5% to 1.1% per annum. Funds distributed heavily through banks and large national distributor networks tended to carry higher trail commissions and therefore larger gaps.
• Debt funds: the gap was typically lower — around 0.2% to 0.5% per annum— because debt fund expense ratios are structurally lower than equity fund expense ratios under SEBI's TER slab rules.
• Index funds and ETFs: the gap was smaller in absolute terms — often 0.05% to 0.2% — because passive funds have very low expense ratios to begin with. However, because the direct plan expense ratio for index funds is already as low as 0.10–0.15%, even a 0.1% saving is meaningful in percentage terms relative to the total cost.

It is important to note that these figures reflect historical observations from industry data and fund factsheets. Actual expense ratios of any specific fund at any given time should be verified on the fund's factsheet, its Scheme Information Document (SID), or on the AMFI website.

The compounding impact: an illustrative example

To understand why the expense gap matters so much over a long investment horizon, consider the following illustrative calculation. These figures use assumed rates and are not predictions of future returns or performance of any specific fund.

Suppose an investor places ₹10 lakh in an actively managed equity fund and holds it for 20 years. Assume the fund's gross portfolio return (before expenses) is 13% per annum in both variants.

• Direct plan (expense ratio: 0.8% per annum) → net return to investor: 12.2% per annum → corpus after 20 years: approximately ₹99.4 lakh
• Regular plan (expense ratio: 1.7% per annum) → net return to investor: 11.3% per annum → corpus after 20 years: approximately ₹80.9 lakh

The difference: approximately ₹18.5 lakhon an initial investment of ₹10 lakh, simply from the expense ratio gap. The fund manager's decisions, the portfolio, and the market were identical in both scenarios. The entire gap was the cost of the distribution chain.

For a SIP investor, the compounding impact is similarly significant. Use our SIP calculator to model the same SIP amount at two different assumed return rates (representing direct vs regular expense ratios) and observe the corpus divergence over 15–20 years.

How to invest in direct plans

There are several routes through which investors can access direct plans in India:

• AMC website or app: each fund house (HDFC AMC, SBI MF, ICICI Prudential AMC, Mirae Asset, Axis AMC, etc.) offers direct plan investments through its own website and mobile application. The investor creates a folio directly with the fund house. This works well for investors who concentrate their investments in one or two fund houses but becomes administratively complex if investments are spread across many AMCs.
• MF Central (mfcentral.com):the industry's joint utility platform, operated by CAMS and KFintech (the two major registrar and transfer agents). MF Central allows investors to transact across all fund houses in one place, consolidate statements, and switch between plans. It is a zero-commission platform by design.
• Kuvera: a direct-plan-only investment platform (free to use) that offers goal-based planning, tax harvesting tools, and portfolio tracking across AMCs and asset classes. It earns revenue from premium features rather than distribution commissions.
• INDmoney:another zero-commission platform that offers direct mutual funds alongside other financial products. The investor should confirm that the plan type selected is "direct" before completing a transaction.
• Zerodha Coin:Zerodha's mutual fund platform offers direct plans and charges a flat fee for Zerodha trading account holders rather than a distribution commission.
• SEBI-registered investment advisers (RIAs): RIAs are legally required to operate on a fee-only basis and cannot earn distribution commissions. They route clients exclusively through direct plans. Engaging an RIA typically involves an annual advisory fee, but investors receive personalised guidance in exchange.

Switching from regular to direct: the process and the tax event

Many investors discovered regular plans only after years of investing and found themselves holding regular plan units bought through a bank or distributor. Switching to the direct plan of the same scheme is straightforward operationally but carries a tax consequence that deserves careful thought.

A switch from the regular plan to the direct plan of the same scheme is treated by Indian tax law as a redemption of the regular plan units, followed by a fresh purchase in the direct plan. This means:

• Any capital gains crystallised at the time of the switch are taxable in the financial year in which the switch is executed.
• If the units being switched are equity fund units held for more than one year, the gains are treated as long-term capital gains (LTCG) and taxed at 12.5% on the amount exceeding the ₹1.25 lakh annual LTCG exemption (as per the tax rules applicable in FY 2026).
• If the units are held for less than one year, the gains are treated as short-term capital gains (STCG) and taxed at 20%.
• The exit load policy of the fund applies at the time of the switch exactly as it would for any redemption. Most equity funds charge an exit load of 1% if units are redeemed within one year of purchase; units held longer typically attract no exit load.
• After the switch, the cost of acquisition of the new direct plan units resets to the NAV on the date of the switch. The original purchase date and cost are extinguished.

For investors with large accumulated gains, it can make financial sense to switch gradually across multiple financial years to manage the LTCG tax liability. A SEBI-registered investment adviser or a tax professional can assist with the sequencing.

Myth: "Direct plans have lower returns"

This misconception has been observed frequently in online forums and in conversations at bank branches. It is important to address it directly because it has caused some investors to remain in regular plans unnecessarily.

The confusion typically arises from comparing the absolute NAV levels of direct and regular plans rather than their returns. Because direct plans were launched on 1 January 2013 with the same NAV as the regular plan at that date, and because they have since grown at a faster rate(lower expenses = higher NAV growth), the direct plan NAV is always higher than the regular plan NAV for any scheme that has been around since 2013. This is not a sign that the direct plan is "expensive" — it is a sign that the direct plan has delivered higher cumulative returns.

A second source of confusion is that an investor who saw "direct plan returns" listed below "regular plan returns" on some old comparison website may have been looking at a data error, a different benchmark period, or a platform that was displaying absolute NAV rather than percentage return. When correctly computed over any identical period using the same start and end date, the direct plan of a scheme will always show a higher percentage return than the regular plan, because less expense was deducted from the same portfolio.

When regular plans might still make sense

The financial mathematics favour direct plans in almost every scenario. However, there are some legitimate situations in which an investor might reasonably remain in a regular plan:

• Investors who genuinely need hand-holding.A good mutual fund distributor provides more than just transaction execution. Some distributors conduct regular portfolio reviews, remind investors not to redeem during market crashes, help with KYC and nomination updates, and assist during fund house mergers or scheme changes. For investors who are not confident managing their own portfolio — particularly older investors or those with limited financial literacy — this service has real value. If the distributor's value addition exceeds the cost of the trail commission, the regular plan can be the net-better option for that individual.
• Small corpus in the early stages of investing. For an investor with a ₹5,000 monthly SIP, the absolute rupee difference between direct and regular plan returns in the first year or two is small. If the investor is still learning about mutual funds and benefits from the guidance and reassurance of a trusted distributor, the cost is arguably justified in the short term while financial literacy develops.
• NRI investors with complex KYC and FATCA requirements. Some NRI investors find it administratively easier to invest through a distributor who manages the documentation, NRE/NRO account linkages, and repatriation paperwork. The convenience premium of a regular plan may be worthwhile in these cases.

The key question is not "is direct cheaper?" (it always is) but "is the service I receive from my distributor worth the cost I am paying?" That is an individual judgement. What investors should avoid is paying regular plan expense ratios passively — without knowing the cost — for a service they are not actually using.

Practical checklist for moving to direct

For investors who have decided to switch from regular to direct plans, the following sequence is generally followed:

1. Identify all existing regular plan holdings using a consolidated account statement (CAS) from CAMS or KFintech, or by logging into MF Central.
2. Calculate approximate capital gains on each holding to understand the tax impact of switching in the current financial year.
3. Prioritise switching funds where (a) the expense ratio gap is largest, (b) the LTCG tax impact is smallest (low accumulated gains), and (c) exit loads have already lapsed (units held more than one year).
4. Open an account on a direct plan platform (MF Central, Kuvera, INDmoney, or directly with each AMC).
5. Execute the switch(es) and retain documentation of the switch transaction for tax filing purposes.
6. Redirect all future SIP investments to direct plans immediately — there is no tax consequence for simply starting a new SIP in a direct plan.

The bottom line

SEBI's 2013 direct plan mandate gave every Indian mutual fund investor the option to eliminate distribution costs from their investment returns. The 0.5–1% annual expense ratio difference between a direct and regular equity fund plan is not trivial: over a 20-year holding period, it can represent 15–25% of the final corpus, entirely attributable to cost rather than performance.

For investors who are comfortable transacting online, have no need for a distributor's advisory support, and have reasonably large or long-duration investments, the case for direct plans is financially compelling. The switch involves a one-time tax event that should be planned carefully, but once executed, the compounding advantage of the lower expense ratio works silently and continuously in the investor's favour.

For context on how expense ratios are structured and regulated by SEBI, see our companion article on mutual fund expense ratios. To model the impact of different return rates on your SIP corpus, use our SIP calculator.

This article is educational only and does not constitute investment advice. All figures cited are illustrative; past expense ratios and returns are not indicative of future results. Tax rules cited reflect Indian income tax provisions as understood at the time of publication and may change. Please consult a SEBI-registered investment adviser and a qualified tax professional before making any investment or switching decision.