Direct v/s Regular Mutual Funds: Know the Difference

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Direct Plan or Regular Plan: Which One Is Better?

Rise in financial awareness and easy access to market has encouraged many individual investors to make their own investment decisions. Also, growth of online investment platforms and technological advancements has allowed investors to purchase, sell and get other mutual fund services with no need of human intervention. However, Do-it-Yourself or DIY investors were still propelled to pay the distributor for the services they did not require. Considering the interest of such investors, direct plan was launched on 1^st January, 2013 for all new and existing mutual fund schemes.

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Difference between direct plans and regular plans

As the name suggests, in direct plans, investors can buy the fund directly from the AMCs or online platforms bypassing financial intermediaries. Those being purchased and sold via intermediaries are categorized as regular plans. Both plans share similarities in terms of investment style, investment objectives, fund management, asset allocation strategy, portfolio composition and benchmark indices. Like regular plans, investors of direct plans can also choose among lumpsum, SIP and STP mode of investing and between dividend, dividend reinvestment and growth options. Direct and regular plans only differ in 3 aspects – expense ratio, rate of returns and NAVs.

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Lower expense ratio of direct plans

Expense ratio is the proportion of MF’s daily net assets used for meeting their annual operating expenses. Annual operating expenses involve numerous costs incurred for advertising, fund management, commissions and administration to the agents and distributors. As the fund houses do not require paying any commission to the distributors selling direct plans, the operating expenses of such plans are lower as compared to regular plans. Basis the fund category, the operating expenses of direct plans is up to 1% lower than their regular counterpart, which translates to lower expense ratio for direct plans.

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Higher returns from direct plans

Lower expense ratios of direct plans result in higher returns. As savings in distribution expenses remain invested in direct plans, it starts to generate returns on their own owing to the compounding effect. While the difference tends to be marginal in the initial years, over the long run it becomes substantial.

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Higher Net Asset Value (NAV) of direct plans

The NAV of direct plans is higher than their regular counterpart because of their higher returns. As the operating expenses of the fund is reduced from its net AUM, the lower expense ratio of its direct plan results in higher NAVs. Moreover, the difference in NAV tends to get wider as the compounding power comes into effect.

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By what margin do direct plans outperform their regular counterpart?

The level of outperformance of direct plans over regular plans primarily depends on their period of investments i.e. longer your investment horizon, higher is the outperformance and difference in their expense ratios.

For instance, assume you invest in regular plan of an equity mutual fund via SIP Rs 25,000 for 30 years at 12% annualised returns having 2% expense ratio, the corpus will grow to Rs 5.17 crore at the end of the tenure.

If the same amount of Rs 25,000 is invested via SIP in direct plan of the same fund for the same tenure having 1% expense ratio, your corpus would grow to Rs 6.46 crore at the end of the tenure. This is a huge difference of Rs 1.29 crore with direct plan corpus outperforming its regular counterpart by about 20%.

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 Comparison of returns from Direct Plans & Regular Plan

Where to purchase direct plans from?

Direct plans can be purchased by retail investors from MF houses or their respective Registrar and Transfer Agents (RTA) either online or through physical application. However, this is a cumbersome process as you will have to apply separately with each fund house or their RTAs. In case of online investing, it results in creation of multiple IDs and passwords and duplication of paperwork.

Investors can instead buy direct plans from online MF marketplaces and independent financial advisors via a single medium by paying advisory fee. While you will pay the fee directly to the concerned marketplaces or advisor, it will not get deducted from your funds’ NAV. Owing to the emergence of alternative business models, some online financial marketplaces like paisabazaar.com are also offering direct plans where investors do not need to pay any advisory fee, annual maintenance fee and various other charges.