A direct plan is what you buy from a mutual funds company (usually from their website), while a “regular plan” is purchased through an advisor, broker or distributor.
In regular and direct mutual funds, the investment objective, asset allocation pattern, risk factor and investment mix are the same. The portfolio of a scheme will be the same for both
So ideally every fund will be had four investment options:
- Direct plan dividend option
- Direct plan growth option
- Regular plan dividend option
- Regular Plan growth options
Do you have to go to a direct plan or a regular plan?
It may seem fairly obvious that the best option is always a direct plan, but I don’t think so. If you want to invest directly with the fund house, you may need to invest separately with each fund house and keep a lot of paperwork or online accounts with each fund house. So, you can deal with a lot of unnecessary things that I want to avoid.
So, I follow a simple rule that is chosen for the direct plan only:
Investing over Rs 100,000 – An expense ratio of 0.5 percent means that only Rs 500 with an investment of 100,000 per year and therefore, anything below me should avoid keeping another account with another fund house.
Investing for more than five years – Investing for an extended time ensures that the NAV variance is increasing and increasing over time. So, I avoid regular plans when my time horizon is over five years. There is no doubt that direct investment is the way to maximize profits.
You save 1 percent commission every year with direct mutual funds, which is not possible with regular mutual funds as they include commission. Small saving gets compounded in the long run, and the returns you gain can be fantastic.
The expense ratio of asset fund is the cumulative ratio of fund assets used for operating, management, advertising and all other expenses. An expense ratio of 1 percent per year means that 1 percent of the fund’s total assets will be used every year to cover the costs.
When you invest through a regular plan, mutual fund houses need to factor in the trail commission that the distributor or agent must pay them to get the business. And this commission is earned by transferring low returns to the direct fund VS regular fund investor.
Investing in a direct plan will bring more profit in the long run as distributors’ commissions are not deducted directly from the plan compared to the regular plan.
Over 15 to 20 years, these commissions compounded over the long-term would be a significant amount.
So it is easy to decide. Always go for DIRECT’s plans. Never go through a distributor/agent.
Conclusion: You can invest in a direct mutual fund portfolio if you are aware of the market and you can decide your investment yourself, as it will produce more returns for you.
If you are unfamiliar with the market and unable to monitor your investments, then you should only invest in a regular mutual fund scheme.
