Mutual Fund Investing: How do direct plans score over regular plans?


Every mutual fund scheme has two variations to invest - a direct plan and a regular plan. While regular funds have been around for quite some time now, of late there has been a lot of buzz around investing in direct mutual fund plans. So what is the deal with direct plans? Do they score over regular plans? The short answer is YES, for a longer one, read on.

What is a direct Mutual Fund Plan?

Direct Funds have been introduced in the mutual fund space in the last few years. The Securities and Exchange Board of India (SEBI) in January 2013 made it compulsory for all Asset Management Companies (i.e. Mutual Fund companies) to allow investors to invest in mutual fund schemes directly via direct plans as opposed to via agents, brokers or distributors, as is the case with regular fund plans.

How does a Direct Plan differ from a Regular plan?

Mutual Funds charge you annual management fees for managing your money in their funds. This is known as expense ratio and is usually expressed as an annual percentage for eg 2% per annum.

Regular and direct plans involve investing in the same mutual fund scheme, handled by the same fund manager who invests in the same portfolio of stocks and bonds.

The only difference is that since investing in regular funds is facilitated by a broker or a distributor, the AMC pays a % of the investment as a commission to the distributor whereas no commission is paid in case of a direct plan.

In other words, the expense ratio or fees is higher in regular plans whereas the expense ratio is lower in direct plans as there is no commission. Lower fees for the same fund means that you get higher returns in direct funds vis-a-vis regular funds.

Let’s see by an example :

Suppose Mr.A invested in Canara Robeco Blue Chip Equity Fund-Direct Plan and Mr.B invested in the regular plan for the same scheme at the same time. Take a look at the returns below.

Name of Fund 1 year returns
(CAGR)
3 year returns
(CAGR)
5 year returns
(CAGR)
Expense Ratio
(CAGR)
Canara Robeco Blue Chip Equity Fund-Direct Plan 13.28% 15.32% 12.37% 1.49%
Canara Robeco Blue Chip Equity Fund-Regular Plan 11.90% 14.04% 11.15% 2.73%

As we can see, the returns are higher for direct plans in each time frame by about 1.2% which is roughly the same as the difference in their expense ratios.

So, in short:
Regular plans -> higher fees -> lower returns
Direct plans -> lower fees -> higher returns

Let’s see an example how much difference this could make in the long term.

Both Mr. A and Mr. B have started a monthly SIP of Rs 5000 in the respective funds, Using Goalwise SIP Calculator, let's see their projected amounts at the end of 20 years
Mr A: Direct Plan CAGR = 12.37 %

1212CAGR

Mr B: Regular Plan CAGR = 11.15%

11-CAG

The difference in projected amounts after 20 years is of Rs 5,21,251!

This is due to the difference in returns of the two funds which in turn is due to the difference in their expense ratios (as everything else is identical) - 1.49 % is for the direct plan and 2.73% for the regular plan.

As evident, we can safely say a direct mutual fund scheme scores over a regular mutual fund scheme due to lower expense ratio, and is capable of fetching higher returns due to reinvesting and compounding of amounts.

All in all, you would earn anywhere between 0.5% to 1.5% more every year if you invest in the mutual fund scheme directly.

Why should you choose Goalwise for Direct Mutual Funds?

Some platforms offer direct plans but don’t recommend the right mutual funds to you while others may recommend funds but offer regular plans, and almost none of them focus on goal-based investing. This is where Goalwise is different.

We offer you the best of both worlds! While goal based investing through direct mutual fund plans is now free on Goalwise, we also offer you all the benefits of having an advisor like investment advice and algorithm backed top-performing mutual funds to achieve your goals faster. So whether you are a novice or an experienced investor, you will benefit from our platform alike. Pay zero commission, no upfront, no hidden charges and make unlimited investments with our recommendations. Too good to be true right?

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P.S. You can see how we score over our competitors here