Understanding Direct vs. Regular Plans of Mutual Funds

Mutual funds are fast gaining traction among investors who are looking for alternative options to create wealth over long and potentially beat inflation. This is evident by the rapid growth seen by the industry over the last few years. The mutual fund industry has grown at a CAGR of 21.61% from Rs 34.10 lakh crore in June 2021 to Rs 61.16 lakh crore as of June 2024.

Let’s take a deeper look at the composition of industry’s assets in regular and direct plans. Of Rs 61.16 lakh crore AUM as of June 2024, Rs 25.37 lakh crore is invested in direct plans while the remaining Rs 35.79 lakh crore is concentrated in regular plans, shows Association of Mutual Funds in India (AMFI) data.

There are 19.10 crore total folios in the mutual fund industry as of June 2024. The folios or investor accounts under direct plans stand at 6.15 crore while regular plans have 12.95 crore folios as of June 2024.

Now, let’s understand the difference between regular and direct plans.

What Are Direct Plans?
Mutual Fund houses launched direct plans from January 1, 2013, following a directive from Securities and Exchange Board of India (SEBI). It is pertinent to note that the portfolios, fund managers and all other aspects of direct and regular plans remain the same. The only difference is in the Total Expense Ratio (TER) and the Net Asset Value (NAV).

How Do Direct Plans Work?
Investing in a direct plan involves investing directly through the AMC or any online investment platform that offers direct plans by bypassing the intermediary. This direct purchase approach means no intermediary commissions, resulting in a lower expense ratio than regular plans. Today, there are many options to invest in direct plans. You can invest through the following channels:

• AMC Websites
• MF Central
• MFU
• Registrar and Transfer Agents like Karvy and CAMS
• Online investment platforms or mobile applications

You will notice that the Net Asset Value (NAV) of direct plans is always higher than that of regular plans. This is because Direct Plans do not charge the costs associated with distribution and commissions.

If you are investing through direct plans, you are responsible for managing your portfolio. This entails:

• Selecting Funds: You choose the mutual funds based on your research and financial goals.
• Monitoring Investments: Regularly track your investment performance and make adjustments as necessary.
• Decision Making: Based on market conditions and your financial objectives, make informed decisions about buying, selling, or holding your investments.
• Operating: You have to do the changes, if any, like email id, mobile number, address, nominee, on your own either through RTAs or the fund house directly.

1. Lower Expense Ratios: Direct plans have lower expense ratios because they do not include distributor commissions.
2. Increased Returns: The cost savings from the lower expense ratios directly contribute to higher returns over the long run.

• Advisory Role: The intermediary provides personalized investment advice based on your financial goals, risk tolerance, and investment horizon. They help you select suitable mutual fund schemes.
• Transaction Management: The intermediary handles the administrative aspects of the investment process, including paperwork, KYC compliance, etc.
• Expense Ratio Impact: The intermediary's commission is included in the fund's expense ratio, which reduces the Net Asset Value (NAV) and can lower returns compared to direct plans. The higher expense ratio reflects the cost of advisory and transaction services.

1. Professional Guidance: Mutual fund distributors play a key role in helping you choose funds that align with your financial goals and risk tolerance. Their expertise can guide you in selecting appropriate funds, timing investments, and rebalancing your portfolio as needed.
   
   
2. Convenience: Intermediaries simplify the investment process by handling paperwork, submitting applications, and managing transactions. This can save you time and reduce the complexity of investing.
   
   
3. Personalized Strategies: Mutual fund distributors develop investment strategies tailored to your long-term objectives. They provide ongoing monitoring and adjustments to ensure your portfolio aligns with your financial goals. They help you overcome your biases and invest rationally, helping you achieve your life goals.

1. Direct Plan: In direct plans, the absence of intermediary commissions leads to lower expense ratios. This means that a greater portion of your investment returns is retained, contributing to enhanced long-term growth.
2. Regular Plan: Regular plans include commissions paid to intermediaries, leading to higher expense ratios. This results in a lower Net Asset Value (NAV).

• Direct Plans: These are ideal for investors with a good grasp of mutual funds and who prefer to manage their investments independently. If you're cost-conscious and comfortable using online platforms to buy and monitor funds, the lower expense ratios of direct plans can be your choice.
• Regular Plans: If you prefer to have professional guidance and don't want to navigate the complexities of investing alone, regular plans are a better fit. These plans include the services of financial advisors who assist with fund selection, paperwork, and ongoing management, making them suitable for beginners or those seeking a more hands-off approach.

• Direct plans have lower total expense ratios (TER) as they do not charge distribution expenses/commission. The difference in TER differs across scheme categories.
• Regular plans are sold through mutual fund distributors. Hence, they charge distribution expenses/commissions. Hence, the TER of regular plans is typically higher than that of direct plans.
• The performance of the scheme will be an outcome of the extent of difference between the expense ratio of regular and direct plans.
• The total expense ratios are capped by SEBI across scheme categories.