When you are looking at mutual fund schemes for an investment, you might have come across a plethora of plans that generally address the specific investment goals of an investor. Under each of these schemes, the investor has the option to choose from the regular investment plan and the direct investment plan. However, before you decide to invest your hard-earned money on a scheme, you should learn about both the investment plans and how they differ from each other in order to determine which one matches your requirement. Even though the direct investment plan and regular investment plan are part of the same mutual fund, are handled by the same fund manager, and have a common portfolio, the expense ratios of both the plans are different.
What is a Direct Plan in Mutual Funds?
Under the direct plan in a mutual fund scheme, the investor can directly purchase the units from the asset management company (AMC) without the need of any intermediary, third party, or broker. Due to this reason, the fund house does not need to pay any commission to the broker as part of a transaction fee or distribution expenses out of the investment. This commission, instead, is added to the investment balance. This, in turn, causes the expense ratio of the scheme to decrease.
What is a Regular Plan in Mutual Funds?
When an investor opts for the regular plan under a mutual fund scheme, he or she can purchase the units from an AMC via a mutual fund distributor, broker, or advisor. In this case, the asset management company will have to pay an additional fee to the intermediary for bringing a new investor to the scheme. This amount is added to the expense ratio, making such kinds of funds slightly more expensive than the direct plans.
Difference Between Regular Plan and Direct Plan
See the table mentioned below to learn about the difference between both the types of investment plans:
|Parameters||Direct Plan||Regular Plan|
|Purchase of units||Units can be purchased by investors directly||Units are purchased with the help of a broker or advisor|
|Additional charges||No additional fee is charged||An additional service fee is paid to the intermediary|
|Expense ratio||Expense ratio is lower since no extra service fee is charged||Expense ratio is higher since intermediary is paid commision by the AMC|
|Net Asset Value (NAV)||NAV is higher||NAV is lower|
|Convenience||Less convenient||More convenient|
|Research and market knowledge requirement||Investors should have sufficient knowledge of market and investment space||Investors don’t have to worry about any research or market analysis since the financial expert guides and helps navigate the investments|
|Financial advice||Investor doesn’t receive any financial advice||Intermediary offers guidance based on the investment goals and risk appetite of investor|
|Returns||Higher returns since expense ratio is less||Lower returns since expense ratio is more|
Advantages of Regular Funds Compared to Direct Funds
Check out the advantages of regular plans over direct plans through the list mentioned below:
- Regular funds are more convenient than direct funds since they require more effort from the investor.
- Under regular funds, the investor is not required to track the performance of the scheme, making it more consumer friendly.
- When opting for a regular plan, the investor receives expert guidance from a professional with market expertise.
- With regular plan, the broker reviews the investment portfolio at regular intervals and makes any changes, if necessary, in order to earn better returns.
Advantages of Direct Funds Compared to Regular Funds
The key advantages of direct plan over regular plan are mentioned in the list below:
- Since there is no additional service fee, the expense ratio of the direct funds is lower compared to that of regular funds.
- Due to a low expense ratio, this plan generates better returns as the amount that is paid as commission in regular plans is reinvested and compounded.