Everything You Wanted To Know About Regular and Direct MF Plans

Mutual funds for long have remained out of favour with retail investors when it comes to investing their financial savings. Nevertheless, MFs have started gaining mindshare of retail investors now. Thanks to initiative taken by the regulator, SEBI and industry body in bringing in more transparency in the operation of MFs. One such initiative was taken in September 2012, where the asset management companies (AMCs) were asked to launch 'direct' plan.

This allowed investors to invest directly into mutual funds, without involving any intermediary such as distributors. Therefore, direct plan are those schemes where investors can directly invest in funds without giving any commission to any agents. On the other hand, funds which involve distributors or any other intermediary become 'regular' plan.

A fund with direct plan has lower expense ratio as compared to regular plan. Since there is commission involved while investing in regular fund, net asset value (NAV) reported by direct plan will be higher than the regular plan. Besides NAV, everything else remain the same for the fund, be it investment objective, investment strategy, portfolio, exit load, etc.

The lower expense ratio helps direct plan fund to outperform regular plans. This outperformance becomes bigger with time as compounding effect kicks in.

How It Impacts Your Returns

Investment in direct plan helps an investor in two ways to generate better results than regular funds. First, the entire amount contributed by the investor is getting invested into the fund and hence assuming returns are positive, future returns will be better. Besides, higher expense ratio of the regular plan will also eat into the fund's returns every year.

For example, a fund like Aditya Birla Sun Life Advantage Fund with regular plan has expense ratio of 2.3%, whereas its direct plan has expense ratio of 1.02%. The difference in one-year return is 1.46%. Similarly, in the case of HDFC Mid-Cap Opportunities Fund, the difference in expense ratios of direct and regular plans is 1.0% and the difference in yearly returns is also 1.12%.  Back of the envelope calculation in the above case shows that the direct plan will generate 15% more return than the regular plan in the next 15 years.

Therefore, we advise you to always go for the direct plan, if you know which funds to buy. Regular plan is advised only if you want to use the expertise of agents in choosing right funds that helps you to attain financial goals.

The best way to invest in direct plan is to visit the website of respective fund houses or MF utility online platform.