Direct vs Regular Mutual Funds: What a 1% Expense Ratio Gap Costs Over 20 Years
The direct and regular plans of a mutual fund hold exactly the same portfolio. The only difference is the commission built into the regular plan, and over decades it compounds into lakhs.
By Pradeep RawalNISM-certified (Series XV & VIII) · Updated · First published 6 Sep 2026 · 7 min read
Update 8 Oct 2026: Rewritten with year-by-year calculations, a switching checklist that accounts for exit loads and capital gains tax (FY 2026-27 rates), and links to official TER disclosures.
Key takeaways
- Direct and regular plans of a scheme own the same securities; the regular plan charges a higher expense ratio because it pays the distributor a trail commission.
- For equity funds the gap is typically 0.5% to 1.2% a year. At 1%, a ₹10,000 monthly SIP for 20 years ends about ₹11.64 lakh lower in the regular plan, assuming an 11.5% net return in direct.
- You can see which plan you hold in your Consolidated Account Statement: the scheme name says "Direct Plan" or "Regular Plan".
- Switching is a sale and a fresh purchase, so mind exit loads and capital gains tax. Often the cleanest move is to start new SIPs in direct and switch old units gradually.
- A regular plan is not wrong if the distributor gives you real, ongoing help. Just know the price, which you pay every year whether or not you get that help.
When direct plans were introduced in January 2013, every mutual fund scheme in India split in two. The regular plan is sold through distributors, banks and agents, who are paid a commission out of the scheme's expenses. The direct plan is bought straight from the fund house or through direct-plan platforms, with no distributor commission. Both plans hold the same shares and bonds, have the same fund manager and follow the same mandate.
The only difference is the total expense ratio (TER): the yearly cost deducted from the scheme's assets. Because the regular plan has to fund the distributor's trail commission, its TER is higher, and that difference is deducted from your returns every single day for as long as you stay invested.
How the expense ratio is charged
You never receive a bill for the expense ratio. The fund deducts a tiny slice of the TER from its assets every day, so the published NAV is already net of costs. A TER of 1.5% a year means roughly 0.004% is taken out each day. That is why many investors underestimate it: it is invisible in the statement, and it is charged whether the fund goes up or down.
SEBI caps the maximum TER a scheme can charge, with lower caps for larger schemes, and every fund house must publish the current TER of both plans of every scheme on its website and through AMFI. For actively managed equity funds the regular plan's TER is commonly between 1.5% and 2%, while the direct plan's is commonly between 0.5% and 1%. The gap, which is essentially the distributor's trail commission, is often around 0.6% to 1.2% a year. Index funds are cheaper in both plans, and the gap is smaller.
Look up your scheme on the fund house's TER disclosure page or on AMFI's website. Note the TER of the direct plan and the regular plan; the difference is what the commission costs you each year.
What a 1% gap costs: SIP over 10 to 30 years
Assume a fund's portfolio earns 12.0% a year before expenses. With a direct-plan TER of 0.5%, you earn 11.5%; with a regular-plan TER of 1.5%, you earn 10.5%. Here is a ₹10,000 monthly SIP in each:
| Period | Invested | Direct plan | Regular plan | Difference | Share lost |
|---|---|---|---|---|---|
| 10 years | ₹12,00,000 | ₹22,55,442 | ₹21,26,594 | ₹1,28,847 | 5.7% |
| 15 years | ₹18,00,000 | ₹48,10,828 | ₹43,78,276 | ₹4,32,552 | 9.0% |
| 20 years | ₹24,00,000 | ₹93,39,666 | ₹81,75,968 | ₹11,63,698 | 12.5% |
| 25 years | ₹30,00,000 | ₹1,73,65,999 | ₹1,45,81,167 | ₹27,84,832 | 16.0% |
| 30 years | ₹36,00,000 | ₹3,15,90,844 | ₹2,53,84,195 | ₹62,06,649 | 19.6% |
The difference is not 1% of your money. It is closer to 12% of the final corpus after 20 years, and the share keeps rising with time. A cost charged every year on a growing balance compounds just as returns do, only in reverse.
A lump sum shows the same effect. ₹10 lakh invested for 20 years grows to ₹88.21 lakh at 11.5% but only ₹73.66 lakh at 10.5%, a difference of ₹14.54 lakh.
How the gap size changes the result
Not every scheme has a 1% gap. This table shows the 20-year cost of different gaps on the same ₹10,000 monthly SIP (direct plan at 11.5%):
| Yearly TER gap | Lower corpus after 20 years | Share of the direct-plan corpus |
|---|---|---|
| 0.50% | ₹6,03,936 | 6.5% |
| 0.75% | ₹8,89,119 | 9.5% |
| 1.00% | ₹11,63,698 | 12.5% |
| 1.25% | ₹14,28,091 | 15.3% |
What the commission pays for, and when it can be worth it
The trail commission is a payment for distribution and service: helping you pick schemes, completing paperwork, reminding you to stay invested during a crash and reviewing your portfolio. Some investors genuinely benefit from that. A distributor who stopped you from selling everything in March 2020 may have been worth many years of commission.
The problem is that the commission is charged on your entire balance, every year, regardless of whether you receive any service. On a ₹50 lakh portfolio, a 1% gap is ₹50,000 a year, which is far more than a fee-only adviser would typically charge for the same help. And because commissions differ between products, there is a built-in incentive to recommend higher-commission products.
There are three reasonable approaches:
- Do it yourself in direct plans if you are comfortable choosing a few simple funds (for example, a broad index fund and a short-duration debt fund) and sticking to them.
- Pay a SEBI-registered investment adviser a fee and invest in direct plans. Registered advisers cannot accept commissions, so their incentives are aligned with yours.
- Stay in regular plans with a distributor you value, knowing what it costs. Ask them to show you the TER of both plans so the price is explicit.
How to find out which plan you hold
- Download your Consolidated Account Statement (CAS) from CAMS, KFintech, MF Central or the depositories (NSDL/CDSL). It lists every folio you hold.
- Read each scheme name. It will say Direct Plan or Regular Plan, and Growth or IDCW (income distribution).
- For each regular plan, look up the TER of both plans and note the yearly gap.
Switching from regular to direct without needless tax
A switch from the regular plan to the direct plan of the same scheme is legally a redemption followed by a new purchase. That has two consequences:
- Exit load. Many equity funds charge 1% if units are redeemed within 12 months of purchase. SIP instalments each have their own purchase date, so recent instalments may still be inside the load period.
- Capital gains tax. For equity funds, gains on units held more than 12 months are long-term and taxed at 12.5% on the total long-term gains above ₹1.25 lakh in the financial year. Units held 12 months or less are short-term and taxed at 20%.
A practical sequence:
- Stop new money going into regular plans. Start your future SIPs in the direct plan. This costs nothing.
- Switch units that are both out of the exit-load window and long-term. Plan the switches so that each year's long-term gains stay near the ₹1.25 lakh exemption, and spread larger switches over several financial years.
- Leave recent units alone until they cross 12 months, then switch them.
- Consider tax-loss units first. Units showing a loss can be switched at any time without tax, and the loss can be set off against gains.
Units of tax-saving ELSS funds are locked in for three years from each purchase date and cannot be switched until the lock-in ends.
The bottom line
Cost is one of the few things in investing you can control with certainty. A 1% yearly gap looks small on a single statement but removes a fifth or more of a long-term corpus. If you can manage a simple portfolio on your own, or pay an adviser a transparent fee, direct plans are the better default. If you value your distributor's help, that is a legitimate choice, as long as you know its price.
Frequently asked questions
Is the NAV of the direct plan higher than the regular plan?
Yes, usually. Both plans started at the same NAV when direct plans were launched in 2013, but the direct plan deducts lower expenses every day, so its NAV grows slightly faster and is now higher. A higher NAV does not make it expensive; what matters is the growth rate, which is higher in the direct plan.
Is switching from regular to direct taxable?
Yes. A switch between plans is treated as a sale of the regular-plan units, so capital gains tax applies, and an exit load may apply if the units are within the load period. Equity units held over 12 months are taxed at 12.5% on gains above ₹1.25 lakh in a year; under 12 months, at 20%.
Do direct plans have lower risk?
No. Risk is identical because the portfolio is identical. Only the cost differs.
Where can I buy direct plans?
Directly from the fund house's website or app, through MF Central (run by the registrars CAMS and KFintech), or through platforms that offer direct plans. Check that the scheme name says "Direct".
What does a SEBI-registered investment adviser charge instead?
A registered adviser (RIA) charges you a fee directly and must not take commissions, so they recommend direct plans. Whether a fee is worth it depends on the advice and how large your portfolio is; for large portfolios a flat fee is often far cheaper than a percentage commission.
Sources and further reading
About the author
Pradeep Rawal is an NISM-certified market professional (Series XV Research Analyst and Series VIII Equity Derivatives) with more than 15 years in personal finance and stock market education. He founded Financial Nirvana, wrote the book From Cubicles to Wealth Creation, teaches money and investing workshops, builds quantitative tools and backtesting systems, and writes about personal finance with the working shown.
This article is for education only and is not investment, tax or legal advice. Tax rules quoted are for the tax year 2026-27 (FY 2026-27) unless stated, and can change; check the latest position with the Income Tax Department or a qualified professional before acting. Examples use assumed returns that are not guaranteed.
