Investing through Direct Plan of Mutual Funds

Regular Plans vs Direct Plans

Mutual funds schemes have Regular Plan & Direct Plan. In Regular Plan investment is done through intermediary or mutual fund distributor. Thus when we invest in Mutual Fund through your bank or online trading platform, by default Regular Plan would be subscribed. Whereas, in case you decide to invest directly through the fund house, without involving any intermediary, one can choose Direct Plan.

Underlying portfolio of the scheme, whether you invest in Regular Plan or Direct Plan is exactly same. Difference in the plans lies in the expense ratio, i.e. the charges levied on the fund return. Expense ratio for Regular Plan is higher due to the commission paid by the fund houses to the intermediary or the distributor.

Direct plan of mutual funds can lead to substantial savings in charges over long period of time. Please refer to the expense ratio comparison between Regular & Direct Plans as on July 2017.

Fund Regular Plan Direct Plan Difference
HDFC Top 200 Fund 2.10% 1.35% 0.75%
HDFC Growth Fund 2.30% 1.65% 0.65%
HDFC Equity Fund 2.05% 1.15% 0.90%
HDFC Mid-Cap Opportunities Fund 2.23% 1.23% 1.00%
HDFC Small Cap Fund 2.46% 1.31% 1.15%
HDFC Balanced Fund 1.95% 0.85% 1.10%
HDFC Prudence Fund 2.26% 1.00% 1.26%
Aditya Birla Sun Life Frontline Equity Fund 2.14% 0.96% 1.18%
Aditya Birla Sun Life Top 100 Fund 2.26% 1.04% 1.22%
Aditya Birla Sun Life Equity Fund 2.25% 0.99% 1.26%
Aditya Birla Sun Life Mid Cap Fund 2.32% 1.34% 0.98%
Aditya Birla Sun Life Dividend Yield Fund 2.29% 1.48% 0.81%
ICICI Prudential Value Discovery Fund 1.77% 0.83% 0.94%
ICICI Prudential Focussed Bluechip Fund 1.78% 0.81% 0.97%

While the difference in expense ratio varies across the fund houses, on an average there is a difference of 1% annual expenses across Regular and Direct Plans. This incremental cost eats into return and can have substantial impact on return over long term.

For example, assuming SIP of INR 10,000 per month. Return in Regular Plan as 10.00% and Direct Plan at 11.00%. We can see from the table below that over the years the difference in return can be a substantial amount.

Years Regular Plan Direct Plan Difference
10.00% 11.00%
1             1,25,656      1,26,239               583
2             2,64,469      2,67,086            2,617
3             4,17,818      4,24,231            6,413
4             5,87,225      5,99,562         12,337
5             7,74,371      7,95,181         20,810
6             9,81,113    10,13,437         32,324
7           12,09,504    12,56,949         47,445
8           14,61,811    15,28,641         66,830
9           17,40,537    18,31,772         91,235
10           20,48,450    21,69,981      1,21,532
11           23,88,605    25,47,328      1,58,723
12           27,64,379    29,68,340      2,03,962
13           31,79,501    34,38,072      2,58,571
14           36,38,092    39,62,160      3,24,068
15           41,44,703    45,46,896      4,02,192
16           47,04,364    51,99,296      4,94,932
17           53,22,628    59,27,191      6,04,563
18           60,05,632    67,39,318      7,33,685
19           67,60,156    76,45,422      8,85,266
20           75,93,688    86,56,380   10,62,692

Thus over 20 year period, mere 1% difference in expense ratio can lead to difference in investment value of upto INR 10.62 lakhs.

Thus clearly Direct Plans of Mutual Funds scores high in comparison to the Regular Plan. But is there still case for Regular Plan? Lot of literature would be available on the internet propagating the Regular Plans due to advantage of advisory service being offered by the financial advisors. But quite frankly most of the proponents of Regular Plans have a vested interest in terms of pushing Regular Plan. In terms of selection of proper funds, enough material is freely available which can enable proper selection of funds. Thus overall it makes immense sense to choose Direct Plans over Regular Plan of Mutual Funds.

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