When it comes to mutual fund investing, most investors focus on returns, past performance and fund categories. But one silent factor that often goes unnoticed is cost — specifically, the difference between direct and regular mutual fund plans. Over long periods like 20 years, this seemingly small difference can quietly eat into your wealth in a big way.
To understand the impact, let’s first look at what long-term investing in equity mutual funds has historically delivered. We analysed around 82 equity funds (regular and direct plans) with a track record of over 20 years, based on data available from Value Research.
Out of 82 equity funds with a track record of over 20 years, 48 funds have delivered more than 12% annualised returns. The best performer delivered an impressive 17.31% CAGR, while the lowest among these was around 9% CAGR. Importantly, the median return is comfortably above 12%, reinforcing that a 12% assumption for long-term calculations is quite reasonable, according to Value Research.
Now, here’s where things get interesting: even if returns are similar, cost structures differ sharply between direct and regular plans.
The real difference: Expense ratios
Take the example of Nippon India Pharma Fund, one of the top-performing funds over 20 years.
Regular plan expense ratio: 1.82%
Direct plan expense ratio: 0.93%
This fund apart, there are several equity funds where the expense ratio of regular plans is about 1% or slightly higher than that of direct plans.
At first glance, the gap of less than 1% may not look alarming. But in investing, time amplifies everything—including costs.
How a small 1% cost becomes a big loss
Abhishek Bhilwaria, AMFI-registered mutual fund distributor at BhilwariaMF, explains this impact: “For a Rs 10 lakh investment over 20 years, opting for a regular mutual fund instead of a direct plan can lead to a substantial loss of potential returns due to the higher expense ratios… Even a seemingly small 1% difference compounds over decades, creating a hidden cost of approximately Rs 15–26 lakh.”
Let’s break that down with simple numbers: Lump sum investment example
Rs 10 lakh in direct plan @ 12%: Rs 96.46 lakh
Rs 10 lakh in regular plan @ 11%: Rs 80.62 lakh
The 1% difference in returns amounts to Rs 16 lakh in 20 years.
SIP example (Rs 10,000/month for 20 years)
Direct plan with 12% CAGR return: Rs 99.91 lakh
Regular plan with 11% XIRR : Rs 87.35 lakh
The amount difference after 20 years with 1% lesser return in regular plan investing: over Rs 12 lakh
This gap exists because every rupee paid as commission is not invested, and therefore does not compound.
Why regular plans cost more
Regular plans include distributor commissions, typically ranging between 0.5% to 1.5% annually. This is built into the expense ratio, so investors don’t pay it directly — but they do bear the cost through reduced returns.
Over time, this becomes a classic case of “invisible leakage” in wealth creation.
But is direct always better? Not necessarily
While direct plans clearly win on cost, the decision isn’t always that straightforward.
Another perspective highlights an important nuance: In reality, the cost gap is often 0.4% to 0.6%, not always a full 1% and this additional cost in regular plans can be seen as a fee for services.
These services include financial planning, fund selection, portfolio monitoring, behavioural guidance during market volatility. And this last point is crucial.
Many investors lose more money due to panic selling or chasing returns than they do from expense ratios.
So, if an advisor helps you stay invested during a crash or prevents poor decisions, that 0.5% extra cost may actually save you more money than it costs.
Direct vs regular: Who should choose what?
Direct plans may suit you if you understand mutual funds well, can research and select funds independently and track and rebalance your portfolio regularly.
Regular plans may work better if you prefer guided investing, are not confident about fund selection, and value discipline and hand-holding during volatile markets.
The debate between direct and regular plans is not just about cost vs returns, but also about cost vs behaviour.
As Abhishek Bhilwaria puts it: “While switching from regular to direct plans can be a powerful strategy to maximize long-term returns, investors should consider that direct plans require self-management… For those who value advisory guidance, the higher cost of regular plans may sometimes be justified.”
In the end, both lower costs and better investing behaviour compound over time. The right choice depends on which advantage you are more likely to benefit from.
But one thing is certain if you ignore costs completely, you could unknowingly give up Rs 10–15 lakh of your wealth over 20 years—and that’s a price worth paying attention to. At the same time, investors should be careful not to reduce their decision-making to just returns and expense ratios. A fund with a lower cost or higher past returns is not automatically the right choice for your portfolio.
Factors like consistency of performance across market cycles, risk level, fund manager strategy, portfolio quality, and how well the fund aligns with your financial goals matter just as much—if not more.
Chasing the cheapest fund or the top performer of the last 5–10 years can sometimes backfire if the fund’s style doesn’t suit your needs or if returns don’t sustain going forward. In simple terms, a good mutual fund is not just about low cost, but the right fit for your long-term journey.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.