Difference
between a direct plan and regular plan in mutual fund investment
What is the difference between a direct plan and regular
plan in case of mutual fund investment? Which is better, especially if I am
investing via SIP?
A Direct plan is what you buy directly from the mutual fund
company (usually from their own website), whereas a Regular plan is what you
buy through an advisor, broker or distributor (intermediary).
In a regular plan, the mutual fund company pays commission to the intermediary. This is then recovered as an expense from the plan. In mutual fund speak, the expense ratio is higher for a regular plan.
What does this mean to you as an investor?
The return you make on a direct plan is higher by approximately 0.5% for equity funds and approximately 0.2% for debt funds.
Which is better?
One would think this was a simple answer.
Higher returns on direct plans = direct plans are better!
However, the comparison is not that simple. In a way, the difference is like a fee you pay to your doctor, lawyer or CA for their professional advice. Whether you should pay that fee or not depends on the investor's own capability and the quality of service you get.
In a regular plan, the mutual fund company pays commission to the intermediary. This is then recovered as an expense from the plan. In mutual fund speak, the expense ratio is higher for a regular plan.
What does this mean to you as an investor?
The return you make on a direct plan is higher by approximately 0.5% for equity funds and approximately 0.2% for debt funds.
Which is better?
One would think this was a simple answer.
Higher returns on direct plans = direct plans are better!
However, the comparison is not that simple. In a way, the difference is like a fee you pay to your doctor, lawyer or CA for their professional advice. Whether you should pay that fee or not depends on the investor's own capability and the quality of service you get.
What are you getting when you invest through a regular plan?
- Investment recommendations: Performance of mutual funds varies quite a bit and the choice of which fund to invest in is critical. The plan (regular or direct) is a secondary consideration. The choice of a good fund vs a poor fund could lead to a difference of as much as 4-5 % in return over time.
- Investment services such as periodic review or rebalancing: By reviewing your portfolio and helping you rebalance, your advisor would further improve the performance of your holdings and get you more return. This could easily be worth another 1-2% over time.
- Additional services like facilitating your investment, tracking your portfolio, and account changes: This is not simply a question of saving time and effort. Most people simply won't do it and neglect their portfolios resulting in poor returns and, sometimes, even lost money because they don't have a record of their investments.
So, if you are a diligent investor with deep knowledge, meaning that you can pick and track your own mutual funds, then the direct plan is better. The advisor provides no extra value and does not deserve their fee.
For most people, however, relying on someone's recommendation is the only option. If that person or entity (for example: Scripbox) knows what they are doing and are not being influenced by other factors like the commission they earn, you will get good service and potentially earn more on your investments vs what you could have done on your own. In that case the advisor has earned their fee and investing in a regular plan would be better for you.
Happy Investing
Source:Scripbox
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