Nithin Kamath spots a costly mutual fund mistake: Are you making it? | Personal Finance

In a post on X, Kamath said investors should review their portfolios to identify the type of mutual fund plans they hold, as the choice can have a significant impact on long-term returns because of differences in costs.

While both direct and regular plans invest in the same portfolio and are managed by the same fund manager, the key distinction lies in the expenses charged to investors.

Direct vs regular mutual funds: What is the difference?

Although both plans invest in the same securities, they differ in how they are sold and the costs investors bear.

Direct mutual fund plans

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  Bought directly from the asset management company (AMC) or through platforms offering direct plans.
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  Do not include distributor commissions.
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  Generally have a lower expense ratio.
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  Can generate slightly higher returns over long investment periods because of lower annual costs.

Regular mutual fund plans

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  Purchased through distributors, banks, brokers or financial advisers.
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  Include distributor commissions within the expense ratio.
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  Usually have a higher annual cost than direct plans.
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  May be suitable for investors who require personalised advice and ongoing investment support.

Since the underlying portfolio remains identical, the difference in returns primarily arises from the higher expenses charged in regular plans.

Why even a small difference in costs matters

Expense ratios are deducted from the fund’s assets every year. Even a small difference between direct and regular plans can compound into a meaningful amount over a long investment horizon.

For investors staying invested for 10, 15 or 20 years, lower annual costs can translate into higher wealth creation, especially when returns compound over time.

However, experts generally advise that investors should not switch solely because a direct plan is cheaper. They should also consider taxation, exit loads, investment objectives and whether they need professional financial advice.

Should you switch from regular to direct plans?

Kamath’s broader message was that investors should first understand what they currently own.

“A lot of investors still don’t know the difference between direct and regular plans. If you are investing in mutual funds, it’s worth checking if your investments are in regular or direct plans,” he wrote.

Before making a switch, investors should evaluate:

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  Whether the existing investment attracts an exit load.
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  Possible tax implications, especially for equity mutual funds.
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  Whether they rely on an adviser for portfolio reviews and financial planning.
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  The potential long-term savings from a lower expense ratio.

For investors who make their own investment decisions, direct plans can help reduce costs over time. Those who value personalised advice, however, may find the higher expense of regular plans worthwhile if it comes with quality financial guidance. The choice should ultimately depend on an investor’s needs, rather than costs alone.