Difference Between Regular and Direct Plan In Mutual Funds

Mutual funds are governed by the Securities and Exchange Board of India (SEBI) which continuously makes changes in the funds so that the funds can adapt to market changes. One such change was made by SEBI in 2012 which involved the introduction of direct plans in mutual funds. Thereafter, from 1^st January 2013, mutual funds were offered in two variants – regular plans and direct plans. Though both these plans are the same, have the same fund managers and the same investment portfolio, there are some intrinsic differences between the two. Let’s understand that:

Regular plans

Regular plans of mutual funds are those plans which are sold by mutual fund brokers, distributors or intermediaries. As such, these plans include the commission payable to the intermediaries in their expense structure. This commission element increases the total expense ratio of the fund.

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Direct plans

Direct plans are those which you buy directly from the mutual fund house. No intermediary is involved in the sale. You invest in these plans online directly from the mutual fund house’s website or from the website of mutual fund registrars like CAMS, Karvy, etc. Since there are no intermediaries involved, their commission doesn’t feature in the expense ratio.

Regular v/s direct plans

There are distinct differences between regular mutual fund plans and direct plans which are as follows –

• The expense ratio of regular plans is higher than direct plans. As the expense ratio is higher, the returns of regular plans are slightly lower than direct plans. There is a marginal difference of up to 1% in the yields of regular plans and direct plans.
• The Net Asset Value (NAV) of regular plans and direct plans is different. The reason for this difference is also the difference in the total expense ratio of both these plans.

Which plan is a better choice?

The returns provided by direct mutual funds are higher than those provided by regular funds. Though the difference is marginal, over the long run, this difference causes a considerable gap in the returns of both these funds. Let’s take an example

INR 5000 is invested monthly in a regular and direct plan. Here’s what the returns would look like after 15 years –

	Direct plan	Regular plan
Assumed annual rate of return	12.75%	12%
Monthly investment	INR 5000	INR 5000
Period of investment	180 months	180 months
Amount after 15 years	INR 26.83 lakhs approx.	INR 24.97 lakhs

The amount is affected quite substantially even with a marginal difference in the interest rate. This is because of the compounding of the marginal interest over the long tenure. So, given the illustration, direct mutual funds are a better bet over regular ones.

However, only the return factor should not be judged when comparing direct and regular mutual fund plans. Regular plans are also beneficial because of the following reasons –

• Since these plans are sold by middlemen, you can get expert guidance on choosing the fund. In case of direct plans you have to choose and buy yourself but regular plans are sold by experienced financial advisors who can help you pick the right fund. If you are an amateur in understanding the mutual fund market, regular funds would be better suited for you
• To buy direct funds you would have to approach different mutual fund houses and buy each fund separately. This might make it difficult for you to keep a track of each fund you have invested in. For tracking your investments too you would have to visit the website of each fund house and check the funds online. Remembering multiple user ids and passwords of different websites might prove to be a hassle. When you buy regular plans through intermediaries you get a consolidated statement of your investments and how are they performing. Moreover, intermediaries also provide you their service in redeeming or switching your investments. This service cannot be availed in direct funds wherein you have to do everything yourself.

Direct plans are better if you are a seasoned investor and need no guidance in buying and managing your investments. If, however, you are not very conversant with the mutual fund segment and need advice, go for regular plans. Make a choice as per your suitability and not only by the difference in the returns generated.