Direct Mutual Fund Vs Regular Mutual Fund: Save in lakhs by choosing the right option!

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May 28, 2021 9:37 AM

The two options available to investors in all kinds and categories of mutual fund schemes are – Regular Plan and Direct Plan.

Direct Mutual Fund or Regular Mutual Fund which is betterAll the features of the direct plan like the investment objective, asset allocation pattern, risk factors are the same as the regular plan except for a lower expense ratio.

Once you have selected the mutual fund scheme in which you want to put in a lump sum amount or start SIP, you have two ways to invest in it. The two options available to investors in all kinds and categories of mutual fund schemes are – Regular plans and Direct plans. Ever thought, how different they are and how to make a choice between them?

Both, Regular Plan and Direct Plan are options available within the same scheme. The only difference between Regular Plans and Direct Plans is in terms of the cost or the charges. All the features of the direct plan like the investment objective, asset allocation pattern, investment strategy, risk factors, facilities offered, and the load structure will be the same as the non-direct plan except for a lower expense ratio. Even the portfolio for the direct and the regular plan scheme is the same.

This is how it matters. Every MF scheme has its own expense ratio (ER) or the total expense ratio (TER) representing the total cost that the mutual fund house or the AMC has to incur to run the scheme. Of the several different cost-heads, an important one is the distribution expense or the commission paid by fund house to the intermediary, the mutual fund distributor.

The ER is charged to the NAV of the scheme on daily basis. Lower ER will mean, lower charges will eat into the NAV and thus reflect a higher return to the investor.

Under the Direct Plan, the distribution expense is left out and only the other expenses are taken into account while calculating the ER. Therefore, in the case of the Direct Plan, the ER is low compared to Regular Plan.

The difference in TERs between regular and direct plans can range from 0.5 per cent to 1 per cent. Over a longer period, on comparing returns of mutual fund direct plans vs regular plans, the direct plans can help you save a sizeable amount in terms of cost.

Since ERs of regular plans are higher than those of direct plans, the direct plan NAV will be higher than the regular plans. Simply put, the value of your investment after you buy units will always be higher in a direct plan compared to a regular plan of the same scheme.

An example

Now let’s run numbers and see how much of savings is possible by saving 1 per cent of ER. Assuming, you invest Rs 5,000 every month for 15 years, a 1 per cent difference in ER will mean a saving of nearly Rs 1.34 lakh, if the growth happens at 8 per cent per annum.

How to invest in Direct Plans

One has to visit a specific fund house individually to invest. While applying for the direct plan, one has to mention ‘direct’ in the agent code section. There are many fintech platforms offering access to invest in direct plans as well. What’s more, even your existing investments including lump sum and SIP’s in MF may be switched to a direct plan of the same scheme, subject to any exit charges.

Fallouts

Before you go direct, ensure that if buying and managing MF portfolio suits you without an intermediary, then only invest through the direct plan and reap the benefit of lower costs. Going direct would keep you away from the services of the intermediary. Things such as change of address, bank details, nominations which your agent would have done for you would have to be dealt directly with fund house through their call center or email.

The selection of the right mutual fund scheme is an important part of one’s investment planning. Proper diversification and selection based on consistent performance over the long term are a few key elements in the selection process. A wrong investment decision can end up harming your investments and goals.

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