Direct vs Regular mutual fund – which one is better?
There are two types of plans in mutual funds – direct and regular
What is Direct Plan in Mutual funds?
A Direct Plan is when you buy directly from the Mutual Fund Company. In a direct plan there is no distributor/broker involved so investors are free from distribution or commission fees. Because of this the expense ratio is low in direct plans.
What is Regular Plan in Mutual Funds?
A Regular Plan is when you buy through an advisor, broker or distributor (Intermediary). As there is an intermediary involved, they get paid a commission which makes regular plans much more expensive than direct plans.
HISTORY
Prior to 2013, Mutual funds were bought and sold only through a distributor/agent since it was thought that the general public lacked awareness. Such funds carried an extra charge as the mutual fund company had to pay a commission to the distributor.
In 2013, SEBI passed a new regulation which made the mutual fund companies to sell the funds directly to the investors, so that they could invest without being charged a commission.
Difference between Direct Plan and Regular Plan:
| Sr.no | PARTICULARS | DIRECT PLAN | REGULAR PLAN |
| 1) | Expense Ratio | A direct plan has no commission to be paid hence the expense ratio is lower | A regular plan has a higher expense ratio as it requires a commission to be paid to the distributor |
| 2) | Returns | The returns in direct plans are usually high as there is no third-party involvement | The returns in regular plans are lower as there is distributor/agent who will be charging a commission |
| 3) | Market Research | In a direct plan, research is done by the investor himself | In a regular plan, research is done by distributor/agent and he gives you advice regarding your investments |
| 4) | NAV | NAV of a direct plan is higher | NAV of a direct plan is lower |
| 5) | Portfolio Tracking | As the investor does the research, portfolio monitoring is done by the investor himself. | Distributor/agent does the portfolio tracking on behalf of you. |
So, the question is, which plan is better for you: direct plan or regular plan?
Both plans are the exact same scheme, run by the same fund manager investing in the same stocks and bonds. The difference is that in case of direct mutual funds, there is no broker/distributor commission. Which means, as an investor, you get higher returns from the exact same mutual fund.
You should try sticking to a direct plan, reason being, in regular plans many of the distributors/agents can misguide you in buying the wrong investments, so they get paid a higher commission. A look at the consumer forum will tell you how many people complain after being cheated. However not all agents are fraudulent, but it does not change the fact that their compensation is based on your investment amount.
Investing in a direct plan will demand you to put in some required efforts, but in the long run it will benefit you.
However, direct plan will give you an additional return of 0.5 – 1%, which makes a huge difference over a period of 15-20 years.