A Direct Plan and a Regular Plan of a mutual fund are two different investment modes into the same scheme, investing in the same stocks and bonds, but with one major difference, ie, direct plans usually have higher returns. Prior to January 2013, there was a single plan structure for all investors.
Then, the Securities and Exchange Board of India mandated fund houses to offer two type of plans: 1) direct plans for investors who want to directly purchase mutual funds from fund houses rather than going through the distribution channel, and 2) regular plans, or the original format of schemes, sold through the distribution channel involving national distributors, banks, independent financial advisors, aggregators, demat account and other digital channels.
A Regular Plan is one in which the Mutual Fund Company pays the broker/advisor a hidden percentage of commission every quarter. This commission is factored into the higher expense ratio of Regular Plans. Apart from the expense ratio, the schemes will also have a different NAV and returns. “This savings in expense ratio (in case of Direct Plans) is added to the returns of the scheme – and passed on to you, the customer, in the form of a higher Net Asset Value (NAV) each day! And so the NAV of Direct Plans is relatively higher than Regular Plans,” Kunal Bajaj, the CEO of Clearlfunds.com observes in a blog post.
We take you through the entire process of investing into a direct scheme of a mutual fund. You can buy Direct Plans online by visiting respective mutual fund house websites. Once you visit their website, and complete all the KYC process, the fund house will email the username and password, and also create a folio number.
Enter your username and password, to start investing into mutual funds. You may choose either the lump-sum or SIP option to invest. Next, choose a scheme to invest, and also the required amount of investment. Further, the investors can also choose between investing into a dividend option or growth option. After having chosen the scheme and dividend or growth option, most importantly, make sure to choose the “Direct Plan” option as opposed to “Regular Plan.” Next, choose a method of paying for the transaction. After every transaction, the investors will also receive a confirmation for their investment.
Most notably, direct funds have outperformed their regular peers since inception. “The annualised returns have been 23.83% in the direct plan and 22.94% in the regular plan. That doesn’t look like much. However, over the years, an investment of Rs 1 lakh would grow to Rs 2.53 lakh in direct and Rs 2.45 lakh in regular. That’s an extra Rs 8,000 on Rs 1 lakh in four and a half years,” Dhirendra Kumar of Value Research said in a recent article published on the website.