Direct Mutual Fund vs Regular Mutual Fund

Hello Friends,

“Little drops of water make the mighty ocean.”

What is the difference between Direct Mutual Fund vs Regular Mutual Fund.

Let’s discuss,

Mutual Fund scheme has a Direct Plan and a Regular Plan. A Direct Plan – You can buy directly from the mutual fund companies usually from websites and Regular Plan – You can buy through mediator like broker, advisor, distributor etc. Commission is paid to the intermediary by company in Regular plans. If you invest in Mutual Funds through a broker or a distributor, you are investing in Regular Plans. All distributors like Scripbox, Fundsindia, Bajaj Capital, MyUniverse, ICICI Direct, etc provide only Regular Plans. But when you invest through the Mutual Fund directly or take the help of an advisor you invest in Direct Plans. All Direct Plan of mutual fund schemes require the word “Direct” or “Direct Plan” to be clearly mentioned in the scheme name.

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Mutual Fund Houses/AMCs (Asset Management Companies) – You can directly go to the Mutual Fund website of the fund. All you need to do is to fill an application form seeking your personal details, bank account details, KYC etc. and you will be allotted the units upon successful payment. Through MFU(Mutual Fund Utilities)/CAMS (Computer Age Management Services) and SEBI registered investment advisers can only recommend direct plans.

Regular plan you invest through a distributor or advisor. AMCs usually pay some fee to agents for their services. Now, investors can avoid paying these commissions and it will translate into more returns every year. The Direct Plan has a lower expense ratio as compared to existing Regular plans in the same schemes since there is no commission to be paid to the distributor under this plan. Investments under the Direct Plan are open to all investors who choose to invest without intermediary.

Expense ratio

You can save 1.5% each year on your mutual fund investments by investing in direct plans. This is because direct plans have an expense ratio of closer to 1%, while regular plans average an expense ratio of closer to 2.5%. Expense ratio refers to the annual percentage of the fund that is paid out as expenses. These expenses include management fees, marketing expenses, operational costs, and distribution fees. Regular plans have a higher expense ratio because the AMC`s include the commissions which they pay distributors, promoter. These commissions are approximately 40-60% of the total expense ratio of the scheme. The expense ratio for direct plans is lower than regular plans. Investors directly benefit from this as AMC`s transfer savings in expense ratio to the investor’s returns. Agents keep earning commission at varying rates for as long as you invest for 10 year. You’ve been paying your agent for each of the past 10 years. Therefore Investments are made blindly, without much inquiry so they tend to recommend plans on the basis of the amount they will earn as commission.

NAV (Net asset value)

The NAV of direct plans is relatively higher than regular plans. The net asset value (NAV) of direct and regular plans differs as a result of the variation in expense ratios. However, this does not mean that direct plans are more expensive. The direct schemes have given a higher appreciation on investment. Hence, their NAVs have grown higher. For example, the HDFC Balanced fund’s NAV is 120.1 in regular plans and 130.5 for direct plans. There would be a separate NAV (Net asset value) for direct plans.

Returns

The direct plans of mutual funds generate higher returns as compared to regular plans. Depending on the expense ratio this difference in returns could be as high as 1.5% yearly. Due to the power of compounding this 1.5% could swell into a sizable amount over a long period of time.

Amount	Return % p.a.	Tenure	Regular Plan	Direct Plan	Difference
Rs. 15000	8.00%	10	27,44,191	28,44,373	Rs. 1,00,182
Rs. 25000	8.00%	10	45,73,651	47,40,622	Rs. 1,66,971
Rs. 15000	12.00%	15	74,93,703	79,65,424	Rs. 4,71,721
Rs. 25000	12.00%	15	1,24,89,505	1,32,75,707	Rs. 7,86,202

If I invest a sum in HDFC 200 Regular and Direct:

After 1 year: If the regular fund has a value A, the direct fund will have value (approximately)

A x (1+0.5%)

After 3 years: If the regular fund has a value B, the direct fund will have a value (approximately)

B x (1+0.5%) x (1+0.5%) x (1+0.5%) and so on.

In the above example I have assumed 0.5% as a constant difference in expense ratios. If this difference is 0.5% in 1^st year, 0.4% in 2^nd year and 0.6% in 3^rd year then we will have:

B x (1+0.5%) x (1+0.4%) x (1+0.6%)

So if you disciple to stay invested for a long period of time a ‘good’ fund then can be a significant difference in corpus.

Direct plans definitely have more benefits than regular plans. Portfolio will be the same for both Plans. Investment Objective, Investment Strategy, Exit Load, risk factors, facilities offered and other terms and conditions will continue to be same.

It is obviously better to invest in direct plans for higher returns, but this also requires more hard work from the investor as he has to do the paperwork and choose a suitable fund.

Do not fear, we have a Online Platform where you can compare and invest in direct mutual fund without paying commission you can save upto 28 lacs in 25 yrs. comprehensive automated advisory that is based on a scientific algorithm and will recommend you to invest in best schemes to fulfill your goals. We providing you all the information you ever need.

Always look for or ask for the word “Direct” or “Direct Plan” to be clearly mentioned in the scheme name in your portfolio statement.

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