What is the difference between Regular and Direct plan?
Off-late there has been a lot of buzz around “Direct Plan” in Mutual Funds. But what does it mean? And how are they better than Regular Plan?
With the cost involved in Mutual Fund investment and how they impact your return. When you invest in a Mutual Fund scheme, the fund house charges you an annual fee for managing your money.
This annual fee, known as the Expense ratio, covers all the expenses including management fees and operating expenses of the fund. The expense ratio is a small part of your total investment value. This is annually pre-defined Percentage. The Mutual fund company levies this expense ratio on your daily investment value and collects fees from it daily.
For example, The expense ratio is 2% of any scheme. And 0.05% of the investment value is charged as fee daily. Means if your investment value is ₹ 1000 then you will pay 5 paise daily as a fee. Therefore, the Mutual Fund scheme or a plan with a lower-Expense ratio will always be beneficial to an investor, as the Mutual Fund company will take less money from the returns generated.
The difference between Direct and Regular Plan.
In Regular Plan, you invest through an intermediary like a financial advisor or your bank relationship manager. Mutual Fund companies have to pay agents commission till the time you stay invested. This becomes an additional cost for Mutual Fund houses and therefore they charge a higher expense ratio and you get lower returns on the other hand this expence are not there in the direct plan.
On the other hand, you purchase Direct Plans directly from the Mutual Fund company. Since there is no broker involved, no commission needs to be paid, and that means lower-Expense ratio and higher returns.
Although the difference between the Expense ratio of Direct and Regular Plans is around 1 %, this can make a big difference in your total corpus. To understand it better, let’s take an example. Just think that Akash and Deepak invested ₹7200 monthly SIP in an equity scheme Akash chose Regular plan and Deepak chose Direct Plan. If these Mutual funds scheme gives better returns in 25 years, then after 25 years, Deepak’s total investment value will be Rs.1.45 crore. But as per this calculation, Akash’s investment value will be just Rs.1.20 Crore. Around 25 lakh difference.
Why? Because Akash’s invested in Regular plan and because of this he has to give more expenses ratio in order to pay his agent the commission Do you want to know how this small expense ratio became 25 lakhs come let’s see This small expense ratio becomes huge because this is an amount levied a percentage of the investment value As the years’ pass, the commissions increase, from the 21st year the commission that the agent receives will be more than the monthly SIP of Akash During these 25 years, Deepak’s investment will be more than Akash. And this greater Investment value will keep giving better returns. So, if you can get higher returns by investing in direct plans why settle for less? If you want to invest in 0% commission Direct Plans from Top Mutual funds for free,
