Direct or Regular MF plan: Which one to buy?

Shital Jibhe
/ Categories: Trending, Markets

Mutual fund schemes come in two options: Direct and Regular. A retail investor may not know the difference between the two and hence may end up choosing the Regular plan, which will give the investor lower returns. The reason for the difference in returns between the two options is simple: Regular plan pays commission to the intermediary who has sold the scheme to the investor. The intermediary may be a broker, agent or a banker who is in the business of selling mutual fund schemes. On the other hand, the Direct plan, as the name suggests, does not pay any commission to any intermediary as the investor buys the plan directly from the mutual fund house (AMC).

So, why are the returns on a Regular plan lower than the Direct plan? The returns are lower because when an investor buys a Regular plan, the commission paid to the intermediary is deducted from the amount invested by the investor. So, when an investor buys a Regular plan, the amount invested gets reduced by the amount paid to the broker or the agent who has sold the plan. Let’s see how this works with an example: Rs 10,000 is invested by investor ‘A’ in a Regular plan and an equal amount is invested by investor ‘B’ in a Direct plan of the same MF scheme. The MF house pays 1% commission to the broker from ‘A’s investment of Rs 10,000, so the investment of A gets reduced by Rs 100 to Rs 9,900, whereas B’s investment of Rs 10,000 remains intact. When an investor invests a lump sum amount in the Regular plan of the MF scheme, a one-time commission will be paid to the intermediary on the entire amount, whereas in the case of SIPs, the MF house deducts commission from every instalment paid by the investor.

Due to the commission paid to the intermediary, the expense ratio of the Regular plan will always higher than the Direct plan for the same scheme. The difference in expense ratios will be reflected in the difference between the net asset values (NAVs) of the two plans, that is, the NAV of the Direct plan will always be higher than the Regular plan. As a result, the returns for the investor of Regular plan will always be lower than the returns for the investor of Direct plan of the same scheme.

While the broker, agent or the banker facilitates the investor in buying and selling of the Regular plan of an MF scheme to earn commission, the investor has to complete some formalities to buy the MF scheme directly from the mutual fund house. So, in order to buy a Direct plan, the investor has to complete the process of one-time registration with user ID and password on the MF website or any online investment advisory website.

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