Direct vs Regular Plan: What Are The Key Differences?

Imagine you are planning an international vacation trip and don't have much idea about the place. In such a case, you have two options. First, contact a travel agent to book your trip. Second, do your research before preparing a travel plan and booking your flight tickets and hotels.

The difference between the two is availing assistance from a third party versus doing it entirely on your own. The regular plan and direct plans differ exactly the same in mutual funds.

In this blog, we will go through the concept of direct and regular plans, direct vs regular plans and ways to identify whether a scheme plan is direct or regular.

What Is a Direct Plan?

A direct plan in a mutual fund scheme allows investors to invest in mutual fund schemes directly with the fund house. In other words, you can purchase mutual fund units directly from the AMC (Asset Management Company) without involving any brokers, distributors or intermediaries.

This helps investors to maximise their ROI (return on investment) by eliminating the distribution fees and commission, resulting in a lower expense ratio compared to regular plans. Direct plans are suitable for those who have at least a basic idea of how to invest in mutual funds.

What Is a Regular Plan?

A regular plan refers to plans in which you invest through mutual fund distributors, investment advisors, or bank relationship managers. As there are intermediaries between the investor and the fund house, these plans have comparatively higher expense ratios to pay out the distribution fees to the distributors. This reduces the overall ROI of the investors. However, regular plans can be beneficial for investors who require continuous assistance and support from their distributors or advisors.

Difference Between Direct and Regular Plan in Mutual Fund

All mutual fund schemes (except ETFs) are available in two variants: direct and regular. Let’s have a closer look into the difference between the two i.e. direct vs regular plans:

• Expense Ratio

Since the fund house has to pay out commissions to intermediaries associated with a regular plan, the expense ratio of a regular plan is higher compared to a direct plan. By availing direct plan of the same mutual fund scheme, you can benefit from a relatively lower expense ratio.

• Net Asset Value

The NAV in mutual funds carries a major difference between direct and regular plan. AMCs usually incur all their fund-related expenses from the Net Asset Value (NAV) i.e., expense ratio is levied on the NAV of a fund. As the regular plans come with a higher expense ratio, the NAV of regular plans is also lower compared to direct plans.

• Returns

As there is no involvement of intermediaries in a direct plan, the expense ratio is lower, leading to higher returns for the investors. On the other hand, a regular plan comes with a higher expense ratio, which reduces the overall returns of the investors.

• Role of Financial Advisor

While investing in a direct plan, you are directly purchasing mutual fund units from the fund house. Here, you make your own decision based on your own research and understanding without any involvement of a financial advisor. However, in regular plans, the distributor or advisor can provide mutual fund scheme recommendations based on your goals, risk tolerance and overall financial status. This highlights the advantages of regular plans over direct plans, as guidance from a financial advisor can help you make more informed investment decisions.

How to Recognise if a Mutual Fund Is Regular or Direct?

Sometimes, choosing between a direct and regular plan gets confusing and might end up being an unsuitable option. However, there are several ways to recognize whether a fund is regular or direct, which are as follows:

• Name of Fund

The primary way of understanding whether it is a direct plan or a regular one is from the name of the fund itself. A direct plan will include the word “Direct” or “Dir”, whereas a regular plan will have the word “Regular” or “Reg” in its name.

• Expense Ratio

You can figure out whether a fund is direct or regular by checking the expense ratio of the two plans. Direct plans usually have a lower expense ratio compared to regular ones.

• Net Asset Value (NAV)

You can also understand this from the NAV. Usually, direct plans have higher NAV than regular plans due to their lower expense ratios.

• Purchase Source

If you are purchasing mutual funds through an intermediary such as a financial advisor, mutual fund distributor, etc., it is a regular plan. However, if you are investing directly through the AMC's app or website, it is a direct plan.

• Consolidated Account Statement (CAS)

Another means of identifying whether a fund is direct or regular is by checking the CAS. Simply find the "Advisor" field in the statement; if it is a regular plan, you will see "ARN" filled in.

ARN stands for Application Reference Number, which is a license number for the distribution of mutual funds in India. Every intermediary, such as a mutual fund distributor and investment advisor, must have an ARN to legally distribute mutual funds and earn commissions in India.

Direct or Regular Plan: Which is Suitable for You?

Now that you have a clear understanding of direct vs regular plans, let us understand which can be a better option between the two. In the past, there was a strong preference for regular plans because distributors handled most of the paperwork, from investing to redemption and updating details.

However, with the digitisation of the banking and financial service sector, many of these processes are now paperless and can be done online via an app or a website. As awareness of the two increases, a growing number of people are opting for direct plans instead of regular ones.

You can consider availing of a direct plan if you are comfortable with online platforms. Choose direct plans if you are a do-it-yourself kind of person and have a basic idea of how to buy and sell mutual funds. However, opt for a regular plan if you prefer having a distributor guiding you through each stage of the documentation process.

Conclusion

Both direct and regular plans come with their own pros and cons. A direct plan empowers you to take control of your investments, offering the potential for higher returns. It can be a better choice for those who are willing to actively manage their own wealth and keep things in their hands.

On the other hand, a regular mutual fund reduces the hassle of paperwork and offers expert guidance, as both of these are typically handled by the distributor. It can be a good fit for someone who prefers a more hands-off approach. In the end, the best choice between a direct vs regular plan is the one that aligns with your needs.

Frequently Asked Questions

1. Which is better - direct vs regular plan?

Both direct and regular plans come with their own pros and cons. If you are a bit tech-savvy and comfortable with online platforms, do your own research and can invest in direct plans. However, if you need someone to guide you throughout your mutual fund journey, you can invest in a regular plan. As the expense ratio is lower in direct funds, the return on investment is higher compared to regular plans.

2. What is the disadvantage of direct plans?

There are several cons of investing in direct plans. It includes difficulty in selecting a suitable mutual fund scheme, developing biases towards similar kinds of funds, and failure to make the right decision at the right time. If you don’t have knowledge about mutual funds, you may find regular plans more suitable.

3. Is it good to switch from a regular to a direct plan?

A regular plan is one that you have invested in through an intermediary who can provide you assistance regarding the paperwork and offer expert guidance. However, if you think that you can manage any of these things on your own, you can switch from regular to direct.

4. What is the advantage of a direct plan?

The main advantage of a direct plan is its lower expense ratio, which can lead to a higher NAV and, can give, a higher return on investment. This happens because direct plans eliminate intermediaries between fund houses and investors, so fund houses do not have to pay commissions, resulting in more profits.

5. Who should invest in direct plan?

Direct plans are more suitable for individuals who are comfortable with online platforms and have the capability of making decisions regarding their mutual fund investments. If you are a DIY type of investor with some knowledge of mutual funds, you may want to choose direct plans.

6. Is it always better to invest in direct plans due to lower costs?

It is better to choose direct over regular only if you are an internet-savvy person and are accustomed to online platforms. This is because, in a direct plan, there will be no one to assist you with paperwork or offer expert recommendations. You have to handle the entire process on your own.

7. What are the tax implications of switching from a regular plan to a direct plan?

When you switch from a regular plan to a direct plan, taxation will be treated as redemption from the regular scheme, which will attract capital gains tax. The investment in the direct plan will be treated as a new investment, with the lock-in period and exit load resetting from the date of purchase of the direct plan.

8. How do the costs compare between regular and direct plans?

The cost difference between direct vs regular plans arises mainly because of the commission paid out to the intermediaries in a regular plan. This leads to a higher expense ratio and lower NAV. As there are no intermediaries in a direct plan, the expense ratio is lower resulting in higher NAV compared to a regular plan.

Regular Plan:

• Expense Ratio: High
• NAV: Low
• ROI: Low

Direct Plan:

• Expense Ratio: Comparatively Low
• NAV: relatively High
• ROI: High

9. How do I find the expense ratio of a direct or regular plan?

To find out the expense ratio of direct vs regular MF, simply visit the mutual fund scheme page on the AMC's website and scroll down to the "Details" section. Under the "Details" section, you will find the "Key Ratio"; here, you will find the expense ratios for both regular and direct.

 

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