Mutual funds have become one of the most popular modes of wealth creation amongst investors. Every mutual fund scheme comes with 2 options for an investor to choose from - A direct plan and a regular plan.
For an investor, to make the right choice, it is important to understand each of these plans. In one MF, everything like portfolio, the fund manager is the same in both direct and regular plans. The only difference between them is that regular mutual funds have a distribution commission while direct mutual funds do not.
A direct plan is when you buy an MF scheme directly from the fund manager, while a regular plan is when you buy the same MF through an intermediary like banks, brokers, financial institutions, etc. For example, if you have to buy a UTI Nifty50 fund. If you buy it through UTI, it will be a direct plan, but if you buy it through any other broker like Angel Broking, Motilal Oswal, or through any bank or NBFc, then it will be a regular plan.
In a direct plan, there are intermediaries like brokers, banks have no role, it is what you buy directly from the AMC. And since there are no intermediaries, investors do not have to pay any commission or distribution fees which brings down its expense ratio. If you invest in the fund through SIP or make a lump sum investment, no transaction charges can be levied since you are directly dealing with the AMC.
The Net Asset Value (NAV), as well as its rate of return, is different from a regular plan and the prospectus specifies ‘Direct’ to help investors identify direct plans.
Regular plans are those mutual fund schemes that are not directly bought through the fund house but through an intermediary. Since an intermediary is involved, the fund house pays a commission to them for letting the investor buy their plan. This commission is then included in the expenses, which increases the expense ratio of a regular plan. Also, a transaction cost is levied if you buy a scheme through an intermediary.
The basic difference between the two is expenses. Due to intermediary involvement, the expense of a regular fund is higher than that of a direct fund.
Generally, a commission of 1-1.25 percent of the AUM is paid to the intermediaries per year. Even though it is not mentioned in the statements but is always reflected in the NAVs. So in a direct plan, the returns will be 1-1.25 percent higher than that of a regular plan.
Also, since the returns of the direct plan are higher, so is the NAV.
To be clear, the NAV of a direct plan will always be higher than that of a regular plan of the same MF scheme.
Which one to buy
At a glance, direct funds look more attractive since they are cheaper. However, an intermediary helps you guide according to your investment profile and risk appetite, thus helping you choose the funds better suited to you.
If you are well versed in the markets or prefer a do-it-yourself attitude, the direct funds are a better pick. But if you want to be guided as per your needs and require help in selecting funds, regular funds are a better choice.