Here’s all you need to know about Direct Plans vs. Regular Plans of mutual funds:
There remains a dearth of understanding about direct plans among the investors. When you want to invest in Mutual Funds, you need to decide upon a lot many things.
One of the critical factors is choosing between direct plans or regular plans. Just like other parameters, this too weighs heavily on your MF returns.
SEBI mandated the Asset Management Companies way back on 1 January 2013 to come up with direct plans of mutual funds. In direct plans, there are no transaction charges/distributor expenses/trail fees like regular plans. There’s a strong reason for this.
Direct plans don’t involve intermediaries like regular plans. When you invest in direct plans, you are directly interacting with the Asset Management Company (AMC) or the fund house. There’s no engagement of an agent/distributor/advisor.
Direct Plans and regular plans have many things in common. As regards asset allocation, fund manager, investment objective, risk measures, portfolio holdings, benchmark, etc.
Direct Plan vs. Regular Plans: The Differences
Direct plans differ from regular plans on various crucial grounds. These are expense ratios, NAVs and Fund Returns.
The expense ratio of Direct Plan is far lesser than that of regular plans. At this juncture, it’s important to know about expense ratio. Expense Ratio relates to expenses incurred by the fund house to manage your money. It is usually stated as a percentage of assets under management.
It includes fund manager’s fee, distributor commission, registrar fee, and marketing & promotion expenses. The expense ratio of the direct plan is less than that of the regular plan.
The reason behind this is the absence of distributor commission. Regular plans are distributor-sourced schemes which entail distributor commission. You are charged upfront commission at the time of investing in the MF scheme. Subsequently, the distributor gets trail commission annually till you stay invested in the scheme.
But, direct plans don’t involve middlemen. Hence, they have a lower expense ratio.
For example- Regular plan of SBI Bluechip Fund has an expense ratio of 1.97%. Conversely, its direct plan has a much lower expense ratio of 1.14%.
Net Asset Value (NAV)
NAV is the price at which MF units are bought and sold. It is calculated after deducting fund liabilities from fund assets, and dividing it by the number of units outstanding. It is used to ascertain the overall performance of the fund. It reflects how much valuable one scheme is as compared to the other.
Expense ratio has a bearing on the level of fund’s NAV. It forms part of liabilities of the fund. A higher expense ratio increases liabilities of the fund. It ultimately reduces the resultant NAV of the fund. A higher expense ratio, thus, nullifies all the gains made by portfolio holdings of the fund.
Direct plans are found to possess higher NAV than regular plans. A lower expense ratio is responsible for keeping former’s NAV at higher levels.
For example- The NAV of the direct plan of Franklin India Flexi Cap Fund is Rs 75.88. On the contrary, NAV of the regular plan of Franklin India Flexi Cap Fund is Rs 73.53.
Ultimately, expense ratio and NAV together determine how much the fund’s going to earn. Due to a higher expense ratio and lower NAV, regular plans generate lower fund returns.
Direct plans produce higher returns owing to lower expense ratio and higher NAV. On an average, a difference of 0.5-1% was found between the fund returns of direct plans & regular plans.
It implies that regular plans give you lower returns while charging a higher cost. Hence, as a rational investor, you may go for a direct plan which provides higher returns at a lower cost.
The following table shows the difference in fund returns of direct plans vis-à-vis regular plans:
You may see how higher expense ratio may drill a significant hole in the fund returns. SBI Small & Midcap Fund has got the highest expense ratio of 1.71. Direct Plan of the fund gives 3 year returns of as high as 34.10%. But large expense ratio causes the fund returns to drop to 32.39%.
You may wonder: “What difference does meagre 1.71% would make to my fund returns?”
Don’t consider the difference of 1.71% as ordinary. It can make a huge impact on your earnings from the mutual fund. The effect of compounding would make this small difference into a substantial gap over the years.
Suppose you invest a lump sum of Rs 100000 each in direct plan & regular plan of SBI Small & Midcap Fund. Consider the same growth rate of 34.1% & 32.39% for direct plan & regular plan respectively. At the end of 20 years, the direct plan would accumulate a corpus of around Rs 3.5 crore. Conversely, the regular plan of the same fund would accumulate a corpus of Rs 2.7 crore.
Now that’s an enormous variance of Rs 80 lakh. The following table shows the progression of fund returns of both direct and regular plans over 20 years.
Who needs to buy Direct Plans?
Mutual Fund investments are full of intricacies. It involves fund analysis & selection, asset allocation, portfolio rebalancing, stepping-up SIPs, KYC compliance, tracking, nomination, etc.
Go for direct plans if higher returns are your priority. Additionally, you should be prepared to conduct all the above transactions independently. Moreover, you need to possess the financial knowledge and ability to understand market movements.
If you want to avoid all these complications and settle for lower returns, then regular plans are the thing for you.
There exists yet another option. You may invest in direct plans and avail services of an experienced fee-based advisor.
Where can you buy Direct Plans?
Investing in Direct Plans can be done via applying directly with each AMC in both offline/online route on their website. Here, you need to visit the website of each AMC separately and apply separately. This process is quite cumbersome.
Alternatively, you may open an account with Mymoneysage.in & invest in direct plans. The “MF Invest” feature of Mymoneysage.in helps you invest in an array of direct plans on a simple click.