What are Regular and Direct Plans?
Every mutual fund scheme in India comes in two versions: a regular plan and a direct plan. A regular plan is one you buy through an intermediary like a financial advisor, a bank, or a distributor. These middlemen provide guidance and help with paperwork,
and for their services, they earn a commission. A direct plan, as the name suggests, is one you purchase directly from the Asset Management Company (AMC) or through online platforms that offer direct investing. This route involves no intermediary, meaning you are on your own to research and select funds.
Why Do Direct Plans Have Higher Returns?
The core difference lies in something called the expense ratio, or Total Expense Ratio (TER). This is an annual fee that the AMC charges to cover its operating costs, including the fund manager's salary, administrative work, and marketing. In a regular plan, the expense ratio also includes the commission paid to the distributor or agent who sold you the fund. Since direct plans have no middlemen, there are no commissions to be paid. This makes their expense ratio lower than that of the same scheme's regular plan. A lower expense ratio means more of your money stays invested and grows, leading to higher returns over time.
How Big is the Difference?
The difference in the expense ratio between a direct and a regular plan can range from 0.5% to as high as 1.5% annually. For equity funds, it's common to see a difference of around 1%. While a 1% difference might sound trivial, its effect over a long investment horizon is anything but small due to the power of compounding. The lower fee means the Net Asset Value (NAV) of a direct plan is always slightly higher than that of its regular counterpart.
Does This Small Fee Difference Really Matter?
Absolutely. Let’s consider a simple example. Imagine you start a Systematic Investment Plan (SIP) of ₹10,000 per month for 20 years. Let's assume the fund's gross return is 12%. In a direct plan with a 1% expense ratio, your net return is 11%. In a regular plan with a 2% expense ratio, your net return is 10%. After 20 years, your investment in the direct plan would grow to approximately ₹86.8 lakhs. The regular plan would grow to about ₹76.6 lakhs. That 1% difference in annual fees could cost you over ₹10 lakhs in potential returns.
Who Should Choose Direct Plans?
Direct plans are best suited for investors who are comfortable doing their own research and managing their portfolio independently. If you understand financial markets, can select funds that align with your goals, and don't need hand-holding, the cost savings of direct plans are a significant advantage. However, if you are a new investor who needs guidance on financial planning, asset allocation, and fund selection, the expertise offered by a good advisor through a regular plan might be valuable. The extra cost is for the advisory service you receive.
How to Invest and Switch to Direct Plans
You can invest in direct plans in several ways: directly through the AMC’s website, via registrar and transfer agent portals like CAMS and KFintech, or through various fintech apps and online investment platforms. If you already hold regular funds, you can switch them to direct plans. This process is treated as a sale (redemption) from the regular plan and a fresh purchase into the direct plan. Be aware that this may trigger tax implications, such as capital gains tax, depending on how long you've held the investment. Also, remember to stop any ongoing SIPs in the regular plan and start a new one in the direct plan to ensure future investments go to the lower-cost option.
