Should you opt for Regular or Direct MF plan?

Not many people understand the difference between regular and direct plans of mutual funds. Actually, the difference is quite elementary. In a regular plan, the investor invests through the mutual fund distributor or agent or relationship manager of a brokerage house. The fund house pays commission to the distributor/agent on the money invested by the investor. Hence, since the fund house incurs distribution cost, the expense ratio in a regular plan is higher than in a direct plan.

The direct plan entails direct investment into a mutual fund scheme by the investor, which in effect eliminates the services of distributor/agent/relationship manager. Here, the investor does his own research or studies mutual fund research reports and decides on which mutual fund scheme to invest. The investor transacts online or visits the MF registrar’s or asset management company’s (AMC’s) office to invest. Since the transaction happens directly, the AMC saves on commission and, as a result, the AMC’s expense ratio is lower in the direct plan as compared to the regular plan.

The benefit of investing in a direct plan is obvious. Since the expense ratio of a direct plan is lesser than a regular plan, the returns generated by the direct plan are higher than the regular plan. Hence, investors who can analyse the performances of various mutual fund schemes and decide on the best mutual fund to invest in should go for direct plans to reap higher returns. However, investors who are not very conversant with mutual fund schemes and do not have the time or the professional knowledge to assess the performances of MF schemes should do well to go for regular schemes with guidance from the investment professionals.