Direct vs regular mutual funds: Are investors paying a lifetime commission for one-time advice?

Mutual fund investors choosing regular plans pay higher expenses throughout their investment journey, raising questions about whether ongoing distributor commissions are justified. Edelweiss Asset Management's Deepak Jain argues that trail commissions compensate distributors for continuous investor support, not merely initial fund recommendations.

Deepak Jain, President & Head Sales at Edelweiss Asset Management, has defended trail commissions in mutual funds, challenging the argument that investors effectively pay lifelong fees for advice received only once.

In a LinkedIn post, Jain wrote: "A lifetime fee for one-time advice."

He acknowledged that the description was catchy but argued that it overlooked the services distributors provide after investors make their initial investments.

"Trail commission isn't a lifetime fee for one-time advice. It's the price of staying invested," Jain said.

How do trail commissions work?

Mutual funds offer two investment options: direct and regular plans. Both invest in the same underlying portfolio, but regular plans carry higher expense ratios because they include distributor commissions.

Trail commissions are recurring payments made to distributors by asset management companies, funded through the expenses charged to regular-plan investors. These commissions generally continue as long as the investor's assets remain under the distributor's servicing arrangement.

Jain argued that distributors help investors maintain SIPs during market crashes, avoid panic redemptions, rebalance portfolios and manage transmission procedures.

"Advice isn't one-time," he said, emphasising that investor support extends beyond selecting a scheme.

MUST READ: Large-and-midcap fund inflows surge 99% as smallcaps lose momentum

ALSO READ: Parag Parikh Flexi Cap exits Meta, buys Netflix: Why is India's biggest active fund reshuffling US bets?

How much can commissions cost investors?

Consider an investor making a ₹10,000 monthly SIP for 20 years.

Assuming a 12% annual return under a direct plan and an 11% return under a regular plan, reflecting a hypothetical one-percentage-point annual cost difference:

Direct vs Regular Mutual Funds: SIP Returns Comparison

The difference amounts to approximately ₹11.5 lakh. These are illustrative projections, not guaranteed returns or actual commission calculations.

ALSO READ: ₹10,000 SIP becoming unaffordable? Why cutting it to ₹2,000 may be better than stopping

Are higher expenses justified?

Jain highlighted India's investor-friendly regulatory framework, noting that entry loads were abolished in 2009 and direct plans introduced in 2013.

He also argued that eliminating recurring commissions could discourage distributors from servicing smaller investors, particularly those investing ₹500 monthly through SIPs.

However, regular-plan investors bear higher expenses regardless of how frequently they receive advice.

For experienced investors comfortable selecting and monitoring funds independently, direct plans may offer meaningful savings.

For those requiring ongoing guidance, regular plans could provide value, provided distributors deliver consistent support.

Ultimately, investors must evaluate whether the additional costs translate into better financial decisions and long-term investment discipline.

DO READ: Too many mutual funds? Why three well-chosen schemes may work better than 10, explains expert