Mutual funds (MFs) have emerged as one of the most popular investment avenues in recent years, mostly because they are a great instrument for wealth creation. All funds come in two variants: direct and regular.A direct plan is what an investor buys directly from Asset Management Companies (AMCs), mostly on their websites, whereas a regular plan is bought through an advisor, broker or distributor.
Consequently, in a regular plan a mutual fund company pays a hidden percentage of commission to the intermediary every quarter. It is recovered as an expense from the plan. This hidden commission is ultimately charged from the investors. Hence the expense ratio (the annual cost of owning the mutual fund scheme) is higher for a regular plan.
The savings in the commission paid to the intermediaries in the regular plan are saved in the direct plan, which is passed on to the customers, in the form of higher Net Asset Value.
If a 35-year-old investor puts Rs 10 lakh in the regular plan of a mutual fund, which grows at a rate of 8% per annum sans 1% commission, then he will be left with Rs 76 lakh when he retires at the age of 65.
On the contrary, the return from the direct plan would be Rs 1 crore, if 1% commission is eliminated.
So, if the regular plan is expensive, then what should be an investor’s motive not to go through the direct plan?
1) Professional recommendations: Investors’ investing goals differ as per their risk and return appetite. And picking the right kind of mutual fund in tandem with that goal can be difficult for a naive investor. Also, the performances of varying funds are a primary decision taking criteria, the impact of which can lead to a difference in return of the investors by 4-5%.
2) Periodic review and portfolio rebalancing: The advisor dispenses with recommendations on portfolio rebalancing and improving the performance of the holding. This service often times gives more effective return compared to investments done through a direct plan.
3) Facilitating investment and portfolio tracking: Most people choosing to invest directly neglect the portfolio once invested, resulting in non-optimised returns and poor performances. Hence, if you are new to the investing game and lack a deep knowledge with respect to picking and suffling mutual fund portfolio, then investing through a regular plan can be a good option.
How to know if you have invested in a Direct or Regular Plan?
The ways of evaluating the investment option is checking the statement. If the scheme says regular, then you have invested in a regular plan. Investments done through banks are regular plans and often carry a hidden brokerage. Even if your agent doesn’t charge a “fee” or insist that he/she has offered a free advice in a regular plan, you are paying a hidden brokerage.
Moreover, if you have been told that the agent is paid through the mutual fund company, and if you have invested in a regular plan you are paying a hidden brokerage.
In a nutshell, direct plans in mutual funds are best for those who want an increased return and are willing to invest directly through an AMC and are comfortable with the KYC compliance issues and documentation process.