What are Direct Plans of Mutual Funds? How to buy them?

One must buy direct plans in mutual funds or regular plans?

This is one question that often comes to mind while one is researching mutual funds for investing.

Though the answer is short and easy, but I thought to write more elaboratelyabout it.

It is important for investors to know the difference between direct plans and regular plans before investing.

So lets get few basic concepts and history behind direct plans.

It was around in year 2012 that SEBI introduced the concept of Direct plans in mutual funds.

Earlier, direct & regular plans had only one NAV displayed for both of them.

These days they have 2 separate NAV. This makes them very distinguished from each other.

What is the difference between direct plans in mutual funds and regular plans?

Direct plans have smaller expense ratio than regular plans (difference: 0.5-1.5%). Why?

When one buy mutual fund units thorough a broker/ distributors/ platforms/ agent, they end up buying regular plans.

From the total invested corpus of a mutual fund, a portion is paid to brokers etc as a commission.

This commission becomes a part of the expense ratio of mutual fund.

This is the reason why, the expense ratio of regular plans are higher.

#1. Who can invest in direct plans in mutual funds?

People who know how to pick mutual funds on their own can buy direct plans.

The benefit of ditect plan is, one can buy the same mutual fund with a lower expense ratio.

As you are not paying any commission, majority portion of your invested money is used in buying the “units”.

Over a longer time horizons, buying mutual fund units of direct plans can build bigger corpus compared to regular plans.

#2. Expense ratio makes a difference in returns

The NAV of mutual funds is declared every day. The declared NAV is after adjusting for the expense ratio.

So one need not do a separate calculation for expense ratio.

Lets take an example of Aditya Birla Sun Life (ABSL) Advantage Fund: Regular plan vs Direct Plan.

Here will see a real life example to understand the difference.

Idea is to visualise the difference in corpus-built over longer time horizons between regular and direct plans.

We will evaluate the same example when one invests in mutual funds through SIP route and in lump-sum.

Let’s begin with SIP…

#2.1 Regular Plan – SIP Investment

  • Expense Ratio: 2.3%
  • Investment horizon: 3Years (since Mar’15).
  • SIP amount: Rs.10,000 per month.
  • Total investment: Rs.360,000
  • Total units purchased: 1,074.53
  • Current value: 462,178.13
  • Return (CAGR): 68%per annum.

#2.1 Direct Plan – SIP Investment

  • Expense Ratio: 1%
  • Investment horizon: 3Years (since Mar’15).
  • SIP amount: Rs.10,000 per month.
  • Total investment: Rs.360,000
  • Total units purchased: 1,050.63
  • Current value: 471,850.24
  • Return (CAGR): 44%per annum.

What is the difference in corpus built between regular plan and direct plan?

Direct plan generated a corpus of Rs.9,672 more than the regular plan in 3 years.

In term of annualised returns the difference is, direct plan earned 0.75% per annum more than regular plan.

Now, lets consider the same example with one time LUMP-SUM investment (instead of SIP).

#2.2 Regular Plan – Lump sum investment

  • Expense Ratio: 2.3%
  • Investment horizon: 3Years (since Mar’15).
  • Total investment: Rs.360,000
  • Total units purchased: 1,227.07
  • Current value: 511,323
  • Return (CAGR): 41%per annum.

#2.1 Direct Plan – Lump sum investment

  • Expense Ratio: 1%
  • Investment horizon: 3Years (since Mar’15).
  • Total investment: Rs.360,000
  • Total units purchased: 1,214.69
  • Current value: 529,025
  • Return (CAGR): 69%per annum.

What is the difference in corpus built between regular plan and direct plan?

Direct plan generated a corpus of Rs.17,702 more than the regular plan in 3 years.

In term of annualised returns the difference is, direct plan earned 1.28% per annum more than regular plan.

How to buy direct plans?

As the name indicates, direct plans can be purchased directly from websites of the mutual fund AMC’s.

Suppose you want to buy ABSL Advantage Fund. Do the following:

  • Visit the website of Aditya Birla Capital.
  • Search for “Aditya Birla Sun Life Advantage Fund”.
  • In the product page you have the option for SIP or Lump sum investment.
  • Pay the money online. The euivalent mutual funds units will be credited to your a/c.

Similarly all Mutual Fund AMC’s offer their “direct plans” on their respective websites.

But to invest like this, one must have their PAN number handy.

The website will ask for the investors PAN number to authenticate the KYC.

KYC authentication by Mutual Fund AMC’s is must as per SEBI guidelines before investing in direct plans.

A person who has a PAN number will get his/her KYC approved in minutes.

Once the person enters the PAN number, the Mutual Fund AMC will immediately allocate a Folio Number.

From here you are good to do.

Buy as many units of your favourite mutual fund (direct plan) as you have planned.

Conclusion

Direct plans are more cost effective mutual funds. They have smaller expense ratio.

Over longer term horizon, investing in direct plans in mutual funds will fetch better returns.

But if this is so, why mutual funds offer “Regular Plans”?

The regular plans are sold through brokers/distributors/advisors.

These advisors help novice investors to select good funds as per ones investment goals.

Hence Regular Plans are better option for those people who has less investing/market knowledge.

So it is clear that Direct Plans generate better returns. But is this all? As an investor do we need to note something else?

Yes, the difference between direct and regular plan is not so much.

For a common man, it does not make a lot of difference (direct plans having marginally better returns).

The difference in returns between direct & regular plan can be in tune of 0.5% to 1.5% (in general).

Final words…

I personally do not buy mutual funds by individually visiting AMC’s websites.

For me investing in mutual funds through a common platform like FundsIndia or Scripbox is more effective.

But these platforms (like FundsIndia) does not offer Direct Plans. They only sell Regular Plans.

So what should be the rule for investing in Direct & Regular Plans.

When you want to stay invested for more than 5 years, go for a direct plan.

For shorter time horizons, regular plans can be preferred for ease of investing.

1 Comment

  1. Thanks for this informative article about direct & regular mutual funds. So if a person is planning to invest in a mutual fund for long term it’s better to go for direct funds. But can sip also be done on direct funds?

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