InvestorQ : If direct plan is cheaper than regular plan then I should opt for it, right?
Karim Sahu made post

If direct plan is cheaper than regular plan then I should opt for it, right?

Swapnil Sarang answered.
4 years ago

Before I dive into your question, let’s first see what direct and regular plans of mutual funds are.

Direct plan of a mutual fund is when you buy a mutual fund directly from a fund house. By investing directly in the mutual fund, you remove the role intermediaries, such as brokers or agents.

This means, the price you for pay for your mutual fund will also be lower as the direct mutual fund is free from commission or distribution fees, which helps lower the expense ratio; expense ratio is the amount fund houses charge investors for the services they provide.

In contrast, if you invest in a mutual fund via a mutual fund broker, distributor or advisor, or agent, then you are investing in a regular plan. What this means is that the net asset value or NAV of the mutual fund you buy via the regular plan will be higher than that of the direct mutual fund’s. This is because the NAV of the regular plan is inclusive of the commission the fund house pays to the various middlemen for bringing in a new investor.

Thus, direct plan of any mutual fund is cheaper than the regular plan of the same mutual fund.

Do note that nothing changes between the regular and direct plan other than its expense ratio and consequently the NAV; everything such as investment objective, asset allocation pattern, investment strategy, exit load, facilities offered, risk factors, and other terms and conditions will continue to be same.

It is obviously better to invest in direct plans for higher returns, but this also requires more hard work from the investor as he has to do the paperwork and choose a suitable fund.

While it does seem that opting for direct funds is better as it is cheaper, it may not necessarily work for you. This is because it requires significantly more hard work on your behalf as you have to do all the paperwork yourself and then find a suitable fund. In contrast, through their years of experience, agents/brokers/distributors can suggest a mutual fund that is best suited for you and your financial situation.

Why you should prefer regular funds over direct funds?

- Its more convenient than going over every detail of a mutual fund

- Expert guidance provided by brokers who have in-depth knowledge about mutual funds

- Regular monitoring and reviewing by distributor helps adjust and rebalance your portfolio as and when required

In a nutshell: If you are well versed with the world of finance and have the time and energy to track your mutual funds, its performance, etc, then you can opt for the direct plan. However, if you’re not hands on with finance and mutual funds, you might need help to research and choose a fund as per your requirements. In that case, regular funds would be a better choice.