For high-net-worth individuals (HNIs), successful investing isn’t just about choosing the right fund—it’s also about optimizing every aspect of the portfolio, including costs. One often-overlooked factor that significantly impacts long-term returns is the choice between regular and direct mutual fund plans.
Both variants invest in the same scheme, are managed by the same fund manager, and follow the same investment mandate. But there’s a critical difference: expense ratio.
Understanding the Cost Gap
- Regular Mutual Funds: Include distributor commissions in their expense ratio (typically 1.5–2.0%).
- Direct Mutual Funds: Purchased directly from the AMC—no commissions, leading to a lower expense ratio (typically 0.5–1.0%).
This 1% or more annual cost difference, when compounded over the long term, can create a significant wealth gap—especially at higher investment levels.
Let’s Look at the Numbers – ₹20 Lakh Example
Assume a ₹20 lakh investment in an equity mutual fund for 15 years, with the fund delivering a gross annual return of 12%.
Plan Type | Expense Ratio | Net Annual Return | 15-Year Value |
Regular Plan | 2.0% | 10.0% | ₹83.6 lakhs |
Direct Plan | 1.0% | 11.0% | ₹94.6 lakhs |
Difference | — | — | ₹11.0 lakhs |
By simply choosing the direct plan, the investor ends up with ₹11 lakh more—without changing the underlying fund, strategy, or risk exposure.
Why That 1% Really Matters to HNIs
HNIs are accustomed to optimizing taxes, structures, and strategies—but often overlook the silent drag of high fees.
- On a ₹50 lakh portfolio, that 1% fee difference can result in a ₹25–30 lakh difference over 15–20 years.
- Even well-performing funds can have returns eroded by high ongoing expenses.
Direct mutual funds let you retain more of the return being generated—which then compounds to build significant long-term value.
Capital Gains Tax on Switching: Still Worth It?
Many investors hesitate to switch due to the tax payable on redemption of regular plan units.
Let’s say your ₹20 lakh investment in a regular plan has grown to ₹36 lakh over 7–8 years. A switch to a direct plan would:
- Trigger long-term capital gains tax (LTCG) at 10% on gains over ₹1 lakh.
- Result in a tax outgo of approx. ₹1.5 lakh.
Now let’s compare the post-tax re-invested amount in a direct plan over the next 10 years:
- ₹34.5 lakh @ 11% CAGR → ₹98.6 lakh
- ₹36 lakh @ 10% CAGR (if kept in regular plan) → ₹93.9 lakh
Net gain: ₹4.7 lakh despite the initial tax—and this grows further the longer you stay invested.
It’s Not About Doing It Alone
Switching to direct mutual funds doesn’t mean you have to take a DIY approach.
Many investors opt for professionally managed portfolios using direct funds—where they receive:
- Asset allocation and fund selection expertise
- Regular reviews and rebalancing
- Goal-aligned investment strategy
- Transparent fee structures (not tied to commissions)
This combines the cost-efficiency of direct plans with the strategic advantage of professional oversight.
Conclusion
For investors with ₹50 lakh or more in mutual funds, efficiency matters as much as performance. Direct mutual funds offer a compelling path to enhanced long-term outcomes—without requiring higher risk or new products.
Even with capital gains tax considered, the net wealth addition from lower fees and higher compounding typically outweighs the short-term cost of switching.
If you manage a sizeable portfolio, take a closer look at your mutual fund holdings. Check whether you’re in regular plans and assess the cost. It may be time to align your investments with a structure that gives more of the return back to you.
Author: Swapnil Kulkarni
Co-Founder, PriceBridge – A PMS of Ayan Analytics Pvt. Ltd.
Swapnil Kulkarni brings over 17 years of experience in wealth management and mutual fund strategies. A nominee for the CNBC TV18 Financial Advisor Awards (2010), he is focused on delivering long-term, tax-efficient, and cost-effective investment solutions to HNIs through managed direct mutual fund portfolios.
