Direct Plans vs Regular Plans : What does it mean and why should you care?
Each Mutual Fund scheme has a Direct Plan and a Regular Plan. If you invest in Mutual Funds through a broker or a distributor, you are investing in Regular Plans. All distributors like Scripbox, MyUniverse, Fundsindia, ICICI Direct, Bajaj Capital etc provide only Regular Plans. But when you invest through the Mutual Fund directly or take the help of an advisor like Kuvera , you invest in Direct Plans. All Direct Plan mutual fund schemes require the word “Direct” or “Direct Plan” to be clearly mentioned in the scheme name. Always look for or ask for this in your portfolio statement.
What’s the difference?
Regular Plans pay commissions to the broker or the distributor. This commission is added to the expense ratio of the scheme. So these plans have a higher expense ratio as compared to Direct Plans that do not have commission expenses. Regular Plan commissions can amount to as much as 1.5% of the AUM(the value of your holdings) as commission from Mutual Funds, every year! When brokers tell you their advice is for free, it isn’t. Because you pay a heavy price (commissions and advice biased by commissions) for it. In effect, regular plan investments give you lower returns as compared to Direct Plans because of these commission expenses. Obviously, a broker will never help you or advise you to invest in Direct Plans.
In short, if you invest in Direct Plans, the same schemes will get you better returns.
Direct Plans will help me save 1.5% commissions every year.. that’s not much!
If you consider the compounding impact of this leakage year on year, it adds up to quite a bit. We did the portfolio value calculations for just a Rs 1 lakh investment in a Direct Plan and a Regular Plan over 40 yrs. Your investments will be worth 35% more in just 20 yrs when you invest in Direct Plans. See chart below
We assumed a 12% Return on investments and a Total Expenses Ratio of 1.0% for Direct Plans and 2.5% for Regular Plans.
But my broker provides me advice. It’s OK if he earns some commission. Is that wrong?
Yes, it is. Because the commission is paid by the fund house and not by you directly. Whose interest will the broker work for? Isn’t there a conflict of interest when the broker has to make a choice between the scheme that suits your risk profile and objectives vs a scheme that pays attractive commissions?
Agreed, Direct Plans are better, but how do I choose which Funds to invest in?
You can visit kuvera.in and try our Financial Planning Solution here. We do your risk profiling and goal planning to build a detailed financial plan. And recommend which Mutual Fund schemes in which you should invest. We have used our years of Investment Management experience to develop a scientific and disciplined approach to investing. Importantly, we are a Direct Plan only platform so our advice is never biased by commissions.