Mutual Funds Direct Plan Vs Regular Plan..!!

Mutual funds give people the sense that they're investing with the big boys and that they're really not at a disadvantage entering the stock market..!!
Ron Chernow.   

Investment in Mutual funds can be through Regular plan and through Direct Plan.

What is a Regular Plan?

• Investing indirectly into mutual fund involving  Intermediaries like distributors, agents and advisers is called Regular plan. 

• Since AMC( Asset management company) has to pay commission to these intermediary community – distributors, agents, banks and financial advisers etc, it charges the client something called Entry loads which varies typically from 2% to 2.5% on equity funds and lower for debt funds.

Benefits of Regular Plan

• For retail investors, going the Direct route is of benefit only if they have financially know-how and have ample time to do research and follow. Selection of mutual funds is not just about expense ratios.

•  If an investor doesn't have the skill or knowledge to be able to select a scheme that has been consistent in giving good returns and is suitable to his purpose then even lower expense ratio can't be of any help when his returns are poor.

• Here comes the role of these financial advisers. These adviser will have access to investor’s information and therefore can help in reviewing and re-balancing  the portfolio , shifting from equity to debt funds depending on goals, strategic asset allocation whenever possible.

What is a Direct Plan?

• Investing directly through the AMC without intermediary is called Direct Plan and has been possible since 2007.The benefit of investing through a Direct Plan was that the investors did not have to pay Entry loads. 

• From August 2009, entry loads for everyone was abolished and the distinction or benefit between direct route and intermediary route was no longer there. 

• However, from 1^st January 2013, this distinction has come back with some distinction. According to SEBI, AMCs will offer the direct plan with a NAV that is separate from the NAV of Regular/Normal plan as the expense ratio of the Direct Plan is lower than regular plans. 

Benefits of Direct Plan

• So any investor who wishes to deal directly with the AMC without any intermediary can do so through the Direct Plan at a lower cost and thereby maximize his returns.

• The difference in expenses for these two routes could be anywhere between 0.5% to 1% p.a. for equity funds, 0.1% to 0.4% p.a. for debt funds and 0.05% to 0.15% p.a. for liquid funds. 

• Hence Direct Plans are likely to give a higher return  year on year when compared to regular plans; and with compounding over a long period of time, this difference could be significant.

Special Note

• Investor can switch from from regular plan to direct plan if he wants, but it will entail tax. As per the definition, any exchange is treated as transfer so the exchange of regular plan into any direct plan will amount to transfer and thus depending on cost and holding period, will entertain capital gain.

Conclusion

• Whether it is direct plan or Regular one, investing in mutual funds needs expertise, knowledge and time.
• Both routes have their pros and cons and depending on your preferences, can serve you well.  

Happy Investing..!!