If you have looked up a mutual fund recently, you may have noticed that the same scheme appears twice: once as a direct plan and once as a regular plan, each with its own NAV. It is one of the most common questions we are asked, and it deserves a straight answer. After all, it is also about how distributors like us are paid.
Same fund, two ways in
Since January 2013, SEBI has required every mutual fund scheme to offer both a direct plan and a regular plan. The two are the same fund in every way that affects how your money is invested:
- the same portfolio of securities;
- the same fund manager and investment strategy;
- the same risk.
The only difference is cost, and that comes down to whether a distributor is involved.
Where the difference comes from
Every mutual fund charges an annual fee, called the total expense ratio (TER), which is deducted from the fund's assets every day. You never pay it separately; it is already reflected in the NAV.
- In a regular plan, the TER includes a commission that the fund house pays to the distributor who helped you invest. This commission is paid as a small percentage of your investment every year for as long as you stay invested (called trail commission). Upfront commissions are not permitted.
- In a direct plan, there is no distributor, so there is no commission, and the TER is lower.
Because the regular plan's expenses are higher, its NAV grows slightly more slowly than the direct plan's over time, even though the underlying investments are identical. Over long periods, that difference compounds.
So why would anyone choose a regular plan?
Because the commission pays for something: a person whose job is to help you make, maintain and review your investment decisions. Whether that is worth it depends entirely on what you need.
A direct plan can be a sensible choice if you:
- are comfortable choosing funds and building a portfolio yourself;
- will handle the paperwork, KYC updates, nominations and transactions on your own;
- have the discipline to stay invested and rebalance when markets are volatile.
Investing through a distributor may suit you better if you value:
- help choosing an approach: matching fund categories to your goals and time horizons;
- a single point of contact for transactions, KYC, nominations, address changes and redemptions;
- someone to review things with as your income, family or goals change;
- a steady voice in volatile markets, when the temptation to stop SIPs or redeem at the wrong time is strongest;
- one relationship across products: investments and insurance considered together rather than in isolation.
What we think you should expect from us
If you invest through regular plans, the commission is built into what you pay, so you are entitled to expect real service in return. With us, that means:
- We will tell you how we are paid. Commission rates vary by fund house and scheme. If you would like to know what we receive on any fund we discuss, just ask.
- We start with your goals, not a product. A fund only makes sense in the context of what the money is for and when you will need it.
- We stay in touch. A relationship is not one transaction. We review your investments with you and help you adjust as your life changes.
- We respect your choice. If, after understanding the trade-off, you would rather invest directly, that is a perfectly reasonable decision.
The bottom line
Direct and regular plans are not "better" or "worse" funds. They are the same fund with different service models. The right choice is the one where you understand what you are paying and are getting value for it.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully. AMD Wealth Tech is an AMFI-registered Mutual Fund Distributor (ARN-322137).