The Rs 1 lakh question: Direct or regular mutual funds? Here's the math

The ongoing debate between Zerodha and Groww over direct and regular mutual funds has prompted many investors to revisit a crucial question: is it worth paying higher fees for professional advice, or should investors opt for lower-cost direct plans to maximise long-term returns?

The discussion gained momentum after Groww introduced regular mutual fund plans through its subscription-based Groww Prime platform. Zerodha co-founder and CEO Nithin Kamath criticised the move, arguing that platforms positioning themselves as low-cost brokers should not encourage investors towards higher-cost regular plans. Groww, however, clarified that direct mutual funds remain at the core of its platform and that regular plans are meant for investors seeking advisory support.

While the debate continues, the biggest differentiator between the two plans remains the expense ratio.

Same fund, different returns

Direct and regular mutual funds invest in the same schemes managed by the same fund manager, but differ in cost and mode of purchase. Direct plans are bought from the AMC or zero-commission platforms, have lower expense ratios and typically deliver better long-term returns.

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Regular plans are purchased through banks, brokers or financial advisers, carry higher expense ratios due to distributor commissions, and are better suited for investors who value professional guidance and portfolio management.

Direct and regular plans invest in the same mutual fund scheme managed by the same asset management company (AMC). The only difference is that regular plans include distributor commissions, resulting in higher expense ratios, while direct plans do not.

At first glance, a difference of 0.5-1 percentage point in annual expenses may appear insignificant. But because mutual fund returns compound over time, the gap can widen substantially over long investment horizons.

Here's the math

Consider an investor making a one-time investment of Rs 1 lakh in a mutual fund that generates 12% annual returns before expenses.

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Assume the direct plan has an expense ratio of 0.7%, leaving the investor with a net annual return of 11.3%. A regular plan, with a 1.7% expense ratio, delivers a net annual return of 10.3%.

Investment period	Direct Plan (11.3%)	Regular Plan (10.3%)	Difference
10 years	Rs 2.92 lakh	Rs 2.67 lakh	Rs 25,000
20 years	Rs 8.52 lakh	Rs 7.10 lakh	Rs 1.42 lakh
30 years	Rs 24.80 lakh	Rs 18.90 lakh	Rs 5.90 lakh

The numbers illustrate how a seemingly small difference in annual costs can translate into several lakh rupees over three decades.

Why do regular plans still exist?

If direct plans generate better returns, why do investors continue to buy regular mutual funds?

The answer lies in the services bundled with regular plans. Investors receive assistance from financial advisers, distributors or wealth managers who help them choose suitable funds, build diversified portfolios, review investments periodically and stay invested during volatile market conditions.

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For first-time investors, retirees or individuals unfamiliar with financial markets, this guidance can be valuable.

Hercules Advisors founder Aditya Shah recently argued that the direct-versus-regular debate misses the larger picture.

"The argument between direct and regular mutual funds is just silly. The market exists for both DIY investors and investors who seek advice," he said, adding that direct plans are best suited for investors who understand risk profiling and asset allocation, while others may benefit from professional advice.

So, which should you choose?

The answer depends on your investing experience.

If you're comfortable researching mutual funds, reviewing your portfolio regularly and staying disciplined through market cycles, direct plans can help maximise long-term wealth by reducing costs.

However, if you need help selecting funds, planning investments or avoiding emotional decisions during market volatility, the additional expense of a regular plan may be justified.

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As the Zerodha-Groww debate highlights, the real question isn't whether direct or regular mutual funds are universally better. It's whether the value of advice you receive is worth more than the extra fees you pay over time.