What is a direct plan vs. a regular plan in mutual funds?
When you invest in a mutual fund in India, you are given two options: Direct Plan and Regular Plan.
Both options invest in the same underlying scheme and are managed by the same fund manager.
However, they differ in how they are purchased and the cost structure involved.
Direct Plan
A Direct Plan is one where you invest directly with the mutual fund company (Asset Management Company or AMC), without involving any distributor, broker, or advisor. Since there are no intermediary commissions involved, the expense ratio (annual fund management cost) is lower.
Key features of a Direct Plan:
- Lower expense ratio: No commission or brokerage is paid to intermediaries.
- Higher returns over the long term: Even a small reduction in expense ratio can significantly boost returns over time due to compounding.
- Investor-driven: You need to do your own research and execution.
- Purchase points: AMC websites, RTA platforms like CAMS/KFinTech, SEBI-registered platforms, and mutual fund apps that offer direct plans.
Example:
If a mutual fund scheme has an expense ratio of 0.8% under the direct plan and 1.6% under the regular plan, over a long-term investment of ₹10 lakhs, the direct plan could give you a noticeably higher return purely due to lower annual costs.
Regular Plan
A Regular Plan is one where you invest through an intermediary, such as a mutual fund distributor, advisor, or bank. The AMC pays a distribution fee or commission to the intermediary, which is included in the fund’s expense ratio.
Key features of a Regular Plan:
- Higher expense ratio: Includes commission for the distributor.
- Guidance provided: Suitable for investors who prefer advice and hand holding in selecting schemes.
- Accessible via: Banks, brokers, financial advisors, or distributor platforms.
Regulatory Guidance
As per SEBI regulations:
- All mutual fund houses are required to offer both Direct Plans and Regular Plans for each scheme.
- AMCs must clearly disclose the difference in expense ratios and returns between direct and regular plans in their fact sheets and performance reports.
- Investors must be informed if they are being sold a regular plan and should be told about the availability of the direct plan option.
Which one should you choose?
- Choose Direct Plan if you are confident in selecting funds on your own and want to maximize your returns by saving on commissions.
- Choose Regular Plan if you prefer expert advice, help with portfolio allocation, or if you are new to investing and need assistance.
**Before choosing, consider your investment knowledge, comfort with digital platforms, and long-term goals.
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