Mutual Fund – Regular Plans Vs Direct Plans

Mutual funds offer various options to invest and grow your wealth. You must select the right fund option to maximise your returns from your investment. And after you have chosen the mutual fund in which you want to invest, you need to decide if you wish to opt for a direct or regular plan.

According to the Securities and Exchange Board of India (SEBI), every mutual fund scheme comes in two variants – direct and regular plans. Let’s learn about the differences between these two plans and decide which one to choose.

What are Direct Plans?

Direct mutual funds are those funds that are purchased directly from the Asset Management Company (AMC). It means that there is no involvement of any third-party agents, brokers, or distributors in selling direct plans.

You can invest in a direct mutual fund online by visiting the respective AMC’s website or SEBI registered investment advisors. You can identify direct mutual funds by looking at the prefix “Direct” before the fund’s name.

What are Regular Plans?

Regular mutual fund plans are purchased through an intermediary, such as a mutual fund broker, distributor, or advisor. These intermediaries charge a certain fee from the fund house for selling its mutual funds.

A regular plan is a better option for novice investors who do not know the market.

Regular Plans Vs. Direct Plans

The SEBI introduced direct plans in 2012 to enable the investors to buy mutual funds directly from the AMC without involving any intermediary. Both direct and regular plans of a particular mutual fund invest in the same assets and are managed by the same fund manager.

However, there are significant differences between these two types of mutual funds. Below is the comparison between direct plans and regular plans based on applicable parameters:

Expense ratio

Direct plans are purchased directly from the AMCs, and there is no intermediary involvement. However, the regular plans are sold through intermediaries, such as mutual fund brokers, distributors, and advisors. These intermediaries charge a brokerage fee from the fund house for selling its mutual funds.

The fund houses recover this fee through the expense ratio of the fund. The total expense ratio for regular plans is higher than direct plans.

Net Asset Value

Net Asset Value or NAV is the current market value of one mutual fund unit. The NAV of any direct mutual fund will always be higher than the regular variant of the same mutual fund.

The total expense ratio of a mutual fund scheme is deducted from its NAV. And since the expense ratio of a direct plan is lower than that of a regular plan, its NAV is on the higher side.

Returns

We have discussed the differences between the expense ratios and NAVs of direct and regular plans. Now, coming to the returns, since both direct and regular plans of the same mutual fund invest in the same assets, there is no difference in their performance or price appreciation.

However, since the expense ratios of regular plans are on the higher side, they automatically bring down their returns. Over a long investment horizon, the direct plans can generate substantially higher returns than the regular plans of the same mutual funds.

Convenience

That is one area where regular plans score over direct plans. By investing in a regular mutual fund, you agree to take the help of a broker or advisor instead of a higher expense ratio. And these intermediaries help you in selecting and buying the best-suited funds as per your financial goals. They also handle applying for the mutual funds and the documentation required for it.

On the other hand, direct plans don’t offer this facility. As an investor, you have to rely on your knowledge to invest in direct mutual funds.

Which is better – Direct Plans or Regular Plans?

After going through the differences between regular plans and direct plans, you must be better positioned to decide which one is more suited for you. They are two different variants of the same mutual fund scheme. While the former is purchased through an intermediary, the latter can be bought directly from the fund house.

If you feel that you have adequate knowledge and understanding of mutual funds, you can opt for direct plans. However, if you want expert guidance and need someone to handle your portfolio on your behalf, regular plans are a better option for you. You should evaluate the pros and cons of both these types by yourself to decide what would work best for you.