Difference Between Direct And Growth Mutual Funds

Last Updated: 18 Aug 2025

Many investors get confused when it comes to deciding between a growth vs. direct mutual fund. The one you choose could have a considerable impact on the returns, expenses, and overall approach. Investors aiming to maximise gains while minimising costs must comprehend the differences between these two varied but essential terms.

This blog will allow you to make better financial decisions in line with your goals by highlighting the differences.

What are Direct Mutual Funds?

Direct mutual funds are simply investment plans that you purchase directly from the mutual fund house without any dealer or broker. There are no commission fees because there is no third party. This significantly lowers the expense ratio, which is the annual cost of managing the fund. In other words, you can obtain a better yield in the long run.

Direct mutual funds are ideal for investors who are savvy enough to make investment decisions on their own or through online platforms. Direct plans also provide you with more comprehensive performance reports and fund analytics to assist in making insightful decisions about your portfolio.

What are Growth Mutual Funds?

Growth mutual funds are a type of mutual fund option where the profits generated are reinvested back into the fund instead of being paid out to the investor. This reinvestment helps to increase the value of your units over time, allowing you to benefit from the power of compounding.

These plans are ideal for investors who have a long-term horizon and are not looking for regular income. Growth mutual funds do not provide periodic payouts, but they tend to offer higher returns in the long run compared to dividend-paying options. However, the gains are only realised when you redeem your units.

Difference Between Direct and Growth Mutual Funds

Understanding the growth and direct mutual fund difference begins with recognising that they refer to different dimensions of a mutual fund. “Direct” and “Regular” refer to how you invest (with or without a broker), while “Growth” and “Dividend” refer to how your returns are managed. However, when we talk about Direct vs Growth in practical terms, it’s often to compare a Direct-Growth plan with a Regular-Growth plan.

Let’s break down the difference between growth and direct mutual fund across key aspects:

Fees

Direct mutual funds carry no commission charges because there’s no distributor involved. As a result, the expense ratio is significantly lower compared to regular plans. Growth mutual funds, whether direct or regular, typically have the same expense structure within their type. But a Direct-Growth plan has the lowest fees overall, as it avoids both dividend payouts and distribution costs.

Risk

Both Direct and Growth mutual funds carry the same level of market risk as they invest in the same underlying assets. But the profits are reinvested and not distributed in Growth plans. That’s why they have a higher mutual fund NAV (Net Asset Value). This means price volatility could be more pronounced, especially over the short term. But the actual risk exposure remains the same between direct and regular variants.

Returns

Returns are where the difference truly shows. Direct mutual funds, owing to their lower expense ratios, tend to generate higher returns over time than their regular counterparts. Growth mutual funds help boost returns further by reinvesting earnings. Combining the two by opting for a Direct-Growth plan can offer the maximum potential returns among all variants, ideal for long-term wealth creation.

Comparison Table: Direct vs Growth Mutual Funds

Parameter	Direct Mutual Fund	Growth Mutual Fund
Definition	Purchased directly from fund house without intermediaries	Reinvests returns instead of paying them as dividends
Fees	Lower expense ratio; no commission	May have higher NAV due to reinvestments
Risk	Market risk remains the same; lower cost helps manage downside	Reinvestment leads to compounding; NAV is more volatile in the short term
Returns	Higher due to the absence of the distributor fee	Higher in the long term due to the compounding effect
Payouts	No intermediary fee; all returns accrue to the investor	No payouts; returns are realised upon redemption
Ideal For	Cost-conscious, DIY investors	Long-term investors not seeking regular income

How much difference do Direct Plans make to returns?

To understand the impact of the lower TER, let us take the case of two plans of the same fund: the Regular Plan and the Direct Plan. The initial NAV is assumed to be Rs 100, and the TER of the Direct Plan is 1.80% as against the Regular Plan TER of 2.45%. Let us look at two different scenarios of returns and see how the lower TER impacts returns.

An interesting point emerges here. When the CAGR returns are lower, the Direct Plan looks a lot better in terms of the return advantage. As John Bogle of Vanguard put it, it is only when the going is tough that you realise the virtue of pinching pennies. The choice is yours!

Conclusion

The selection of Direct Vs Growth funds completely depends upon your financial goals, risk appetite and knowledge on investments. The former allows you to invest at cheaper rates, whereas the latter compounds your returns with the power of reinvestments.

In this regard, a Direct-Growth mutual fund plan can be the most dominant combination for building wealth in the long term. A proper understanding can help investors make well-informed decisions and unlock the full potential of their mutual fund investments.

Frequently Asked Questions

Which mutual fund is better, growth or direct?

They serve different purposes. A direct plan is better for saving on fees, while a growth option is better for long-term compounding. You can choose a Direct-Growth combination for best results.

Can I switch from growth to a direct mutual fund?

Yes, you can switch from a regular-growth plan to a direct-growth one by submitting a switch request. Be aware that tax implications may apply.

Do we need a demat account for direct mutual funds?

No, a demat account is not mandatory. You can invest in direct mutual funds through AMC websites or registered online platforms using your PAN and KYC details.