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Investing in Mutual Funds: Regular plan vs Direct plan

Every mutual fund scheme has two types of plans: Direct and Regular. There are numerous distinctions, all of which are interconnected. In this article, we will understand these differences in detail.
Regular plan vs direct plan

Till 2012, investors would invest in mutual funds through intermediaries like mutual fund distributors. In 2012, the Securities Exchange Board of India (SEBI) asked all Asset Management Companies (AMCs) to give an option to investors to invest in mutual funds directly. In this article, we will explore what are regular and direct mutual funds and compare their differences.

What are regular mutual fund plans?

  • A regular mutual fund plan involves investing by availing the services of an intermediary such as a mutual fund distributor (MFD), advisory, broker, etc. The intermediary gets paid a commission by the asset management company. The commission is added to the scheme expense ratio. As a result, the expense ratio of regular schemes is on the higher side.

Who can benefit from regular plans?

  • The services of intermediaries are helpful to people with limited or no knowledge of mutual funds. The intermediary can help the investor:
    1. Identify and quantify their financial goals
    2. Make a goal plan for each financial goal
    3. Do risk profiling
    4. Decide the asset allocation
    5. Start investing and do regular follow up till the financial goal is achieved.
  • So while availing of the services of an intermediary and investing in a regular scheme, the investor will have to pay a higher expense ratio. But, at the same time, the investor benefits from the intermediary's professional services.
  • Image: How regular plan works
Regular plan vs direct plan_1

(Source: https://www.valueresearchonline.com/stories/50810/direct-vs-regular-mutual-fund-plans-which-one-should-you-choose/)

  • The investor can also avail of the services of a fee-only financial advisor and invest in direct mutual funds.

What are direct mutual fund plans?

  • As the name suggests, a direct mutual fund plan allows an investor to invest directly in a mutual fund scheme with the asset management company. There is no financial intermediary involved during the investment process. Since there is no intermediary involved, there is no commission paid. Hence, the expense ratio of a direct plan is lower than that of a regular plan.
  • An investor can invest in direct plans through the asset management company, either through the AMC website or by visiting the AMC branch office. An investor also has the option to invest in direct plans through intermediaries such as Glide Invest, Groww, etc. In this case, even though an intermediary is involved, no commission is paid.

Who can benefit from direct mutual fund plans?

Investors with good knowledge of mutual funds can choose to invest in direct plans. They will benefit from the lower expense ratio in the form of higher returns than regular plans. As discussed earlier, investors can also consult a fee-only financial advisor and invest in direct plans. The fee-only financial advisor can charge a fee and make a comprehensive financial plan for the investor, and cover all their financial goals. The advisor can recommend mutual fund schemes, and the investor can invest in direct plans.

Image: How direct plan works

Regular plan vs direct plan_2

(Source: https://www.valueresearchonline.com/stories/50810/direct-vs-regular-mutual-fund-plans-which-one-should-you-choose/)

  • For every mutual fund scheme, the AMC has to manage the money separately for the regular option and the direct option.

Regular plan vs direct plan

  • Let us look at some of the differences between the regular plan and the direct plan.
FeatureRegular planDirect plan
Intermediary involvementAn intermediary such as MFD, broker, bank, etc., is involved to whom a commission is paid.There is no intermediary involved, and hence, no commission is paid.
Expense ratioThe expense ratio of a regular plan is higher than a direct plan.The expense ratio of a direct plan is lower than a regular plan.
Net asset value (NAV)The NAV of a regular plan is lower than a direct plan.The NAV of a direct plan is higher than a regular plan.
ReturnsThe returns of a regular plan are lower than a direct plan.The returns of a direct plan are higher than a regular plan.

The difference in returns between a regular plan and a direct plan

  • The returns of a regular plan will always be lower than the returns of a direct plan. However, to understand the difference between the returns, let us take an example. Mr X and Mr Y have started a monthly SIP of Rs. 6,000 in the same mutual fund scheme. Mr X has invested in the regular plan, and Mr Y has invested in the direct plan. Let us see what will be the difference in returns over a period of 25 years.

Table: Difference in returns between a regular plan and a direct plan

Regular plan vs direct plan_3

(Source: https://www.etmoney.com/blog/what-is-the-difference-between-regular-and-direct-plans/)

  • As seen in the above difference, after 25 years, Mr X will accumulate Rs. 1.20 crores by investing in the regular plan. BY INVESTING IN THE DIRECT PLAN, Mr Y will accumulate Rs. 1.45 crores. So, by investing in a direct plan, Mr Y has accumulated Rs. 25 lakhs (17.2%) higher than Mr X.

Identifying whether your plan is regular or direct.

  • After seeing the vast difference in returns between a direct and regular plan, you must wonder which plan you invested in. The Glide Invest Portfolio Analyzer tool helps you identify whether your plan is direct or regular and a lot more.
  • The tool helps you to:
    1. Detect whether you have invested in any poor-performing funds
    2. Identify whether you are paying high fees
    3. Identify whether your mutual fund investments are exposed to high risks
    4. Get a 360-degree detailed analysis of your investments
  • To get a detailed analysis of your current portfolio, you need to generate your statement and upload it on the Glide Invest website or app. You can do via Portfolio Analyser

By investing in a direct plan, regular plan vs direct plan: Which one should you choose?

  • Choose a plan depends on your knowledge of mutual funds. If you have good knowledge of mutual funds, you may opt for direct plans over regular plans. Also, if you are okay with paying fees to a fee-only financial advisor, you can opt for direct plans over regular plans. However, suppose you have little to no knowledge of mutual funds and are okay with paying a higher expense ratio in return for professional advice from an intermediary. In that case, you can opt for regular plans.

Investing in mutual funds with the Glide Invest App

In this blog, we have understood the difference between regular and direct plans and which one to choose. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals

With Glide Invest, you will get guidance for:

  1. A personalized risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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