Mutual Funds are available to you through two schemes – Direct Plans and Regular Plans. While both schemes have most things in common, including the way they are managed, asset allocation, risk measures, investment objectives, benchmark etc, there are few key differences that all investors should be aware of in order to make a sound and informed choice.
Direct Plans are sold directly to investors by AMCs or through select online platforms. Regular Plans, on the other hand, are sold through distributors and financial advisors, and involve a commission that comes out of the investor’s pocket. Hence, Direct Plans have lower expense ratio compared to their regular counterparts. This makes Direct Plans cheaper and translates into higher returns for investors.
What’s crucial is that since lesser expense is deducted from your Direct Plan, you earn a higher amount which gets your higher returns, and this goes on. This results in significantly higher returns by Direct Plans in the long run.
For example, the expense ratio of a popular equity fund direct plan is 1.10% lower in comparison to its regular plan. Now suppose you invest Rs. 15000 for a period of 25 years through SIP. While the regular plan gives15% annualised return, its direct counterpart offers 16%. This means you’d create a corpus of Rs 4.9 crore through regular plans and 5.9 crore respectively.
Since Direct Plans have a lower expense ratio, as they save in commissions paid out to the mutual fund advisors and brokers, this savings is added to the returns and passed to the investor in form of higher Net Asset Value (NAV). Hence, Direct Plans always have higher NAVs than Regular Plans.
However, it should not be perceived that Direct Plans are more expensive. It only means Direct Plans given a better return on savings, leading to more growth for NAV of your MF Units.
Where to buy from?
While Regular Plans are easily available both online and offline through financial advisors, Direct Plans can be purchased from the website or branch of AMCs. Direct Plans have also recently been made available on select online marketplaces.
What should you choose?
Direct Plans score over Regular Plans almost on all counts. It is ideal for regular investors with a fair knowledge and understanding about market movements. New and inexperienced investors, who are unsure about where to invest, may consider Regular Plans, even though they offer lower returns. However, there are marketplaces that offer Direct Plans on their platform along with specialized team who can help make you make the right investment choices, at absolutely zero cost.
<<This article was originally published in DNA MONEY>>