Every mutual fund scheme has two plans – Direct and Regular plans. There are three key differences, all inter-related, if you compare direct vs regular mutual funds – how you purchase, the price (NAV) and ongoing cost (total expense ratio). Both the plans have their benefits. Investors should understand how these two plans work in terms of the cost structure, how it affects their returns and make informed decisions regarding whether to invest in Direct or Regular mutual fund plans.
Total Expense Ratio
For the recurring operating expenses incurred by the mutual fund company in servicing the investor, a fee known as total expense ratio (TER) is charged to the investor. TER is charged proportionately against the assets of the scheme and adjusted in the price or Net Asset Value (NAV) of the unit. TER includes management fees, registrar’s fees, trustee fees, marketing costs and distribution costs. Distribution cost is the commission paid to the mutual fund distributors / financial advisors who are intermediaries between the asset management company (AMC) and the investor. TER is one of the most important criteria to compare direct plan vs regular plan
Direct Mutual Fund Plan
Direct plans are bought from the AMC and no intermediary is involved. You can invest in direct plans online by going to AMC website or by visiting the AMC or the registrar’s office in your city. You can also invest in direct plans through SEBI Registered Investment Advisors (RIAs); RIAs, however, charge a fee to their clients for their advisory services. Since mutual fund distributors are not involved in direct plan investments, the asset management company does not have to incur distribution expenses (distributor’s commissions). As a result, if you compare regular vs direct mutual fund, you will find TERs of direct plans are lower.
Regular Mutual Fund Plan
Regular plans are bought through mutual fund distributors. Mutual fund distributor provides services like advising investors on which mutual scheme to invest in, submitting investor’s Know Your Client (KYC) documents to the Registrars and Transfer Agents (RTAs) or AMCs, helping investors with the investment process (e.g. submitting application forms, cheques etc to the RTAs/AMCs), ongoing services (e.g. generating account statements, redemption requests etc). For these services, the distributors receive commissions from the AMC as long as you remain invested in the regular mutual fund plans. The AMC adds these commissions to the TER of regular plans. As a result the TERs of regular plans are higher than those of direct plans.
Differences between Direct and Regular Plans
Following are the key difference between direct and regular mutual fund -
- Net Asset Value (NAV): The TER of any mutual fund plan is adjusted from the NAV. Since TERs of regular plans are higher than those of direct plans, the NAVs of direct plans are higher than the regular plans. In other words, your investment value after you have made your purchase will always be higher in a direct plan compared to a regular plan.
- Returns: We have discussed theTER difference between regular and direct mutual fund. The difference of TER between regular and direct plans varies from scheme to scheme and AMC to AMC, depending on the commission structure of AMCs. For example commissions of equity funds are usually higher than some types of debt funds e.g. overnight funds, liquid funds etc. Difference in TERs between regular and direct plans can range from 0.5% to 1%. This directly affects the returns of regular and direct plans. If the TER of a regular plan is 0.75% more than that of direct plan, then the direct plan will give 1% higher CAGR return than the regular plan. Over a long investment horizon, if you compare returns of mutual fund direct vs regular plans, the direct plans can add up to substantial amount of difference in returns on your investment.
- Role of financial advisor: Direct plans are for do it yourself (DIY) investors since they do not need help of financial advisors in mutual fund transactions. Online investment platforms of the AMCs / RTAs and transactions through mobile apps, have made transactions much simpler for investors who wish to invest in direct plans. However, apart from assisting with transactions, financial advisors help investors make investment decisions (e.g. whether to invest in equity, debt or hybrid funds, which scheme to invest in, when to sell etc), monitor investment portfolio etc.
Conclusion
In this article we have discussed direct vs regular mutual fund plans, how they work, how you can invest in them and main difference between direct and regular mutual fund. Direct plans have lesser costs and give higher returns over regular plans. Over a sufficiently long investment horizon, the difference in returns can be substantial. However, you need to have some investment experience and knowledge to invest in direct mutual fund plans. If you make wrong investment decisions, then you may end up harming your financial interests.
You also need to devote more time in monitoring the performance of your investments and take appropriate actions as and when required. If you need help in making investment decisions like understanding your risk appetite and risk profile of the scheme, asset allocation, selecting the right mutual fund scheme, then you should take the help of a financial advisor. Different investors have different levels of investment experience. You should understand the pros and cons of investing in direct versus regular mutual fundplans and decide what works best for you.
