If you are planning on investing in mutual funds or have recently invested in them, you must know that mutual funds are available in direct and regular plans. But what is a direct plan? How is it different from a regular mutual fund plan? To understand the difference between these two different types of investment plans, continue reading:
What is a direct mutual fund plan?
A direct plan is a mutual fund plan which is generally bought directly from the Asset Management Company (AMC) or fund house who is running that particular fund. Traditionally, a retail investor would personally visit the AMC to buy a direct plan but these days it is possible to buy the plan directly from the AMC’s website over the internet. When it comes to direct plan usually there is no involvement of brokers, agents or any third party aggregators. Since there is no commission or brokerage involved and investors directly buy the fund from the AMC, the expense ratio of a direct plan is relatively lower. As mentioned earlier, it is possible to buy a direct mutual fund plan through both online and offline mode.
What is a regular mutual fund plan?
A regular mutual fund plan is available with third party aggregators like brokers and mutual fund agents. However, these days even AMCs are offering regular plans to mutual fund investors. A regular plan can be brought through an intermediary and investors need to visit the AMC to buy the plan. Investors can buy regular plans of various AMCs through an intermediary. However, these third party aggregators levy a commission fee to AMCs. These brokerage charges or commission fees are recovered by the AMC by charging regular plan investors with a high expense ratio. If you compare, the expense ratio of a regular plan is always higher than that of a direct plan.
What distinguishes a direct plan from a regular plan?
Apart from the fact that there is a difference of expense ratio between direct and regular mutual fund plans, here are some of the other factors that distinguish one from the other:
|Criteria||Direct Plan||Regular Plan|
|Expense ratio||Low than regular plan||Higher than direct plan|
|Returns||Subject to market volatility||Lower than direct plan because of a high expense ratio|
|Market research||Carried out by the investor||Carried out by the advisor|
|Investment expertise||Not provided||Provided by the advisor|
Should you invest in a direct plan or a regular plan?
Several investors shrug off the idea of investing in mutual funds with a regular plan because it has a high expense ratio. Although that does make sense to some extent what retail investors do not understand is that a regular plan offers a lot of other features as well. While it is difficult to make an informed investment decision for the investor alone (especially if you are a first time investor), a mutual fund advisor might be able to guide investors in a better way. They also offer expert advise and help investors buy funds that will suit their risk appetite and investment objective. Whereas when you buy a direct plan, you are all on your own and you may have to do some thorough research before making an investment decision. The only reason regular plans have a high expense ratio because the AMC is obliged to pay commission fee to the third party aggregator. Both regular and direct plans are managed by the same fund manager. The NAV of a regular plan is lower than that of a direct plan but that shouldn’t be the driving factor for investors while investing in mutual funds.