A declaration first, because it changes how you should read this. We earn nothing from mutual funds. No commission, no distribution arrangement, no referral of any kind. Our revenue from this site comes from course sales and from broker account-opening links.
That means we have no reason to push you towards any fund or any category, and it is worth knowing before reading anybody's guidance on this subject.
Direct or regular: the decision worth the most money
Every mutual fund scheme in India exists in two versions, and most people have never been told.
A regular plan pays a commission to whoever sold it to you, funded from the fund's expenses every year for as long as you hold it. A direct plan is the same scheme, the same manager, the same holdings, bought without an intermediary — so that commission is not paid and the expense ratio is lower.
The difference is typically a fraction of a percentage point a year, which sounds negligible and is not. It is charged annually, on the whole balance, for the entire holding period. Over two or three decades of compounding, that recurring difference removes a meaningful share of the final amount — and it is removed regardless of whether the fund performed well.
The trade-off is real and worth stating fairly. A regular plan buys you an intermediary, and a good adviser who stops you from selling during a fall can be worth considerably more than the fee. The problem is that the commission is paid whether or not that advice ever arrives, and the person receiving it has an obvious interest in which products you hold.
If you want advice, a fee-only Investment Adviser charges you directly and does not earn from the products recommended. If you do not want advice, the direct plan is the same scheme without the charge. What serves nobody is paying a commission every year for advice that was given once, at the point of sale, by somebody paid to give it.
What the expense ratio really costs
The expense ratio is the annual charge deducted from the fund for running it. It is not billed to you — it is taken out before the published return is calculated, which is why most people never notice it.
Three things about it are worth internalising.
It is charged in bad years too. Performance varies; the charge does not. A fund that loses money still deducts its expenses, and that asymmetry is the single most reliable difference between two otherwise similar funds.
It compounds against you. One percent a year is not one percent of the final amount. It is one percent of a growing balance, every year, and over long periods the cumulative effect on the end value is far larger than the headline number suggests.
It is the only characteristic that is known in advance. Future returns are unknown. Future manager decisions are unknown. The charge is published and fairly stable. When comparing similar funds, it is the one input you can actually rely on, which is why it deserves more weight than it usually gets.
This is most of the argument for index funds over actively managed ones, covered separately on this site. An active fund has to outperform by more than the extra it charges, every year, merely to break even against a cheaper passive alternative.
Reading a factsheet without being misled
Every fund publishes a monthly factsheet. Most of it is presentation and a few parts are information.
Past returns are the least reliable item on the page, and they are always displayed most prominently. Funds are marketed after a good run, which means the period shown was selected because it looked good. A three-year number covering exactly one favourable cycle tells you about the cycle rather than about the fund.
The benchmark comparison matters more than the return, and only if the benchmark is appropriate. Also check whether the comparison uses a total return index, which includes dividends. Against a price-return benchmark, a fund can appear to beat the market while actually lagging the correct comparison.
Check the manager's tenure. A ten-year record produced by somebody who left two years ago is a record of a person who is no longer there.
Read the actual holdings, not the category name. Categories are defined by rules, and funds sit at the edges of their definitions. Two funds in the same category can hold substantially different things, and a fund whose top holdings duplicate what you already own is not adding diversification.
Note the exit load and its period, which is a charge for leaving early rather than a reason not to leave.
Finally, the question people skip: does this fund overlap with what you already hold? Several broad Indian funds own much the same large companies. Owning four of them is one position held four times, with four expense ratios.
A short checklist
In rough order of how much each decision affects the outcome.
Decide the allocation before the fund. How much in equity, how much elsewhere, based on when you need the money. Selecting a fund before answering that is choosing an instrument for a purpose you have not defined.
Choose direct over regular unless you are genuinely receiving advice you would pay for separately.
Prefer lower cost among similar options, because it is the only input known in advance.
Check overlap with existing holdings before adding anything new.
Check the benchmark and the manager's tenure, and treat headline past returns with suspicion rather than as evidence.
Then stop. The most common mistake after this point is switching — chasing whichever fund led the last year, paying exit loads and realising gains each time. The switching costs more than the difference between two reasonable funds, and the fund that led last year is not more likely to lead the next one.
An account that shows the cost
Funds and shares in one place, with charges itemised. Free to open
We earn no commission on mutual funds and nothing here recommends any scheme, category or provider. Fund categorisation rules, expense ratio caps and taxation are set by SEBI and by law and are revised periodically — check current rules and each scheme's own documents. This is educational material and not advice. We run no tips group and no signal service, we manage nobody's money, and no return is promised.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is the difference between a direct and a regular plan?
They are the same scheme with the same holdings and manager. A regular plan pays a commission to whoever sold it, funded from the fund's annual expenses for as long as you hold it. A direct plan has no such commission and therefore a lower expense ratio.
How much does the expense ratio actually matter?
More than it appears. It is charged annually on a growing balance, in bad years as well as good ones, so over decades the cumulative effect on the final amount is far larger than the headline percentage. It is also the only characteristic of a fund known in advance.
Should I pick the fund with the best three-year return?
Past returns are the least reliable item on a factsheet and the most prominently displayed. Funds are marketed after good runs, so the period shown was chosen because it looked good. Check the benchmark, the manager's tenure and the cost instead.
Is it bad to hold several equity funds?
Often it is simply redundant. Many broad Indian funds hold much the same large companies, so owning four can be one position held four times with four expense ratios. Check the actual holdings for overlap before adding another.
Do you earn anything if I buy a mutual fund?
No. We have no distribution arrangement and receive no commission on any fund. Our revenue from this site comes from course sales and from broker account-opening links, which is why this article can describe the direct-versus-regular question plainly.
Related Reading
- The beginners course, for Chennai
- Why cost favours the passive option
- Two ways to hold the same index
- Checking whether an adviser is fee-only
- The decision that comes before the fund
- Total return versus price return benchmarks
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
