Direct and Regular Mutual Fund Plans
We discussed various types of mutual funds, including growth and dividend options. Another option that you will come across while investing in mutual funds is Direct and Regular plans.
In this chapter, we will understand what they are and how they can affect your investment. But before we go into that, let us first understand a very important concept – Expense Ratio.
What is Expense Ratio?
The expense ratio is the annual fund operating expenses of a mutual fund scheme. It consists of management fees, administrative expenses, distribution fees and other costs. For understanding direct and regular plans, we need to know about distribution fees. Distribution fees are the promotional and marketing expenses incurred for a scheme including commissions paid to the financial advisors or mutual fund brokers.
Keeping this in mind, let us understand direct and regular plans:
When you purchase a mutual fund directly from the fund house, it is known as a direct plan. In this case, there is no broker or distributor or any other intermediary.
Since in a direct plan, the AMC does not have to pay commissions and brokerage to an intermediary, the expense ratio is relatively low. A lower expense ratio means that the return is higher because you pay lesser charges.
A regular plan is one when the scheme is purchased through a broker or a distributor. In this case, the AMC has to pay commission to the broker, and hence the expense ratio is higher.
As per SEBI’s regulations, the total expense ratio is factored into the NAV. Hence, you will find that the NAV of Direct Plans is lower than the NAV of Regular Plans.
Direct Plan vs Regular Plan
We know the most common question in this regard will be the difference between the two. The picture below provides a comprehensive understanding of various parameters:
Should you go for the direct plan or a regular plan?
If you have the time to monitor your portfolio and the basic knowledge of financial markets, a direct plan is the best option. The entire purchasing and redeeming process is quite simple, thanks to online investing. In the direct option, you pay a lesser expense ratio, which naturally translates into more returns.
However, if you are a busy professional with no time to spend managing your portfolio or you lack the expertise to manage it on your own, taking the help of a financial advisor is the best choice. However, keep in mind that even if a financial advisor advises you, it is always beneficial to do preliminary research before investing or redeeming. After all, it is your money, and you will handle it the best.