If you want to invest in Mutual Fund, then first you have to choose the right fund according to your investment objective and risk profile. But apart from this, there is another important thing, towards which investors often do not pay attention. And this is the difference between regular and direct plan of the chosen mutual fund. Many new investors may not know that to invest in the same mutual fund scheme, they can adopt two routes – first regular plan and second direct plan. Therefore, first let us know what they mean.
What is the regular plan of mutual fund?
During the investment process in a regular plan of a mutual fund scheme, several intermediaries like distributors, agents, brokers, bankers or advisors are involved between the Asset Management Company (AMC) operating the mutual fund and the individual investor. That means, in this plan, common investors do not deal directly with the mutual fund AMC.
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Meaning of direct plan of mutual fund
Direct plan of mutual fund scheme means that investors do not need to use any distributor, agent or broker to invest money in it. They can invest by dealing directly with the Asset Management Company (AMC) that operates their favorite mutual fund.
Regular plan means more expenses
In regular plans, the expenses increase due to the involvement of various intermediaries like distributors, agents, brokers between the AMC and the investor, because all of them are paid fees or commission by the AMC. The company ultimately bears all these expenses from your invested money.
The expense ratio of the fund increases due to distribution fees and commission paid in regular plans. And the higher the expense ratio, the lower will be your net return on the scheme.
Direct plan means better returns
In the direct plan, there is no distributor, agent or broker between the investor and the AMC, thereby saving the commission or fees paid to these intermediaries. This means that you have to pay less fees on your investment, due to which the net return of your investment increases.
Generally, the growth of Net Asset Value (NAV) of a direct plan of the same scheme is better than the regular plan of a mutual fund scheme. This means that the chances of your fund value increasing over time are greater in direct plans.
Past data related to the performance of mutual fund schemes also shows that the returns of direct plan in the same scheme are usually higher than the regular plan.
Understand the difference in returns with the help of example
If we compare the average annual returns of the regular plan and direct plan of the same mutual fund scheme, there will not be much difference in percentage terms. But how even this small difference can have a big impact on your corpus over a long period of time, let us understand this with the help of long term returns of regular and direct plans of Quant Tax Plan. The net asset of this 10 year old mutual fund scheme is Rs 4,606 crore.
Difference in fund value between direct and regular plans:
52,83,924 – 48,85,299 = Rs 3,98,625.
In this example, the amount invested in the Direct and Regular plans is equal and the difference in average annual return between the two is only 1.36% (24.5% – 23.16%). But even this small difference makes a difference of about Rs 4 lakh in their fund value over 10 years.
