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 the TER 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 fund plans and decide what works best for you.
FAQs
How will I know if I have invested in Direct or
Regular Plan?
Check the account statement of every mutual
fund scheme you have invested in. You can get your account statement from the
AMC or consolidated statement from the RTA (e.g. CAMs, Karvy etc). If you have
invested in Direct Plan, the mutual fund scheme name will include the word –
“Direct”.
How will I know the difference in TER of
regular and direct plans?
TERs of regular and direct plans of each mutual
fund scheme are disclosed in the monthly factsheet of the schemes. You can
download the monthly factsheets from the AMC websites.
Can I change from regular to direct plans?
Yes, you can change from regular to direct
plans at any time by putting a request to the AMC. However, this switch will be
treated as a normal redemption or switch. In other words, if you are switching
from regular to direct plan within the exit load period, exit load will be
charged on the amount shifted to direct plan. If you switch after the exit load
period then there will be no charges. Also, when you switch from regular to
direct plans, it will have tax consequences. If you shift within the short term
capital gains period (1 year for equity funds and 3 years for non-equity funds),
you will have to pay applicable short term capital gains tax. If you shift
after the short term capital gains period, then you will have to pay long term
capital gains tax.