Not all investments are the same when investing in mutual funds, even if you and someone else invest in the same fund. This is not surprising. The difference comes from your investment plan: Regular or Direct Plan.
This small detail can significantly affect your returns, often costing or benefiting you thousands of rupees in the long run. This article aims to break down the differences in simple language and show how you might lose returns to someone else without knowing it.
Let’s dig into the real impact of these plans and how you can choose the smarter path to wealth creation.
What is a Mutual Fund Plan?
Let’s quickly understand a mutual fund before diving into regular and direct plans. A mutual fund pools money from several investors and invests it across different securities like stocks, bonds, or money market instruments. It’s managed by a professional fund manager who makes decisions to achieve the fund’s objective—be it growth, income, or liquidity.
Every mutual fund in India offers two investment plans: Regular and Direct.
The Core Difference Between Regular and Direct Plan
1. Distribution Channel
- Regular Plan: You invest through a third-party agent, broker, or distributor (such as banks or financial advisors).
- Direct Plan: You invest directly with the mutual fund company (AMC) without any middleman.
2. Expense Ratio
This is the most crucial factor. The expense ratio is a fee charged by the fund house to manage your investment.
- Regular Plan: Higher expense ratio because it includes distributor commissions.
- Direct Plan: Lower expense ratio as there’s no intermediary commission.
3. Returns
Because of the higher expense ratio, returns in regular plans are lower than in direct plans, even though both invest in the same portfolio.
Let’s break this down with an example.
A Realistic Example: How Much Returns Are You Losing?
Let’s say you invest Rs. 10,00,000 in the ABC Equity Fund.
Plan Type Expense Ratio 10-Year CAGR Final Corpus
Regular Plan 2.0% 12% Rs. 31,06,000
Direct Plan 1.0% 13% Rs. 34,39,000
The difference in returns over 10 years = Rs. 3,33,000
You’re investing in the same fund, managed by the same fund manager, but the person who chose a direct plan earned Rs. 3.33 lakh more, all because they avoided the regular plan’s hidden cost.
Why Do Regular Plans Still Exist?
Many investors are unaware of the cost difference. Others prefer handholding or personalised advice from agents or relationship managers. Regular plans provide comfort to people who:
- Lack of time to manage their investments.
- Need help with documentation or selecting the right fund?
- Prefer personal advice or trust a known agent.
But here’s the harsh truth: most agents are paid commissions from your investments, which could lead to biased advice.
So, while you get convenience, you pay for it through lower returns—often unknowingly.
How Commissions Work in Regular Plans
In regular plans, mutual fund companies pay trail commissions to distributors from your investment every year.
Let’s say:
- Commission = 1%
- Your investment = Rs. 10,00,000
- Commission earned by agent = Rs. 10,000 per year
Over 10 years, that’s Rs. 1,00,000—money taken from your returns and paid to the intermediary.
It’s like someone earning from your investment journey without adding any real value year after year.
Transparency and Disclosure: Direct Plan Is More Investor-Friendly
SEBI has made it mandatory for AMCs to disclose the difference in returns between direct and regular plans in account statements. This transparency has increased awareness, but many investors still ignore or don’t fully understand it.
When you log into your mutual fund dashboard and compare the NAVs of regular vs. direct plans of the same fund, you’ll often see that the NAV of the direct plan is higher. That’s because it has grown faster due to lower expenses.
Who Should Choose a Direct Plan?
A direct plan is a wise choice for:
- DIY investors who can research and monitor funds themselves.
- Tech-savvy individuals use platforms like Coin, Zerodha, Kuvera, or Paytm Money.
- Cost-conscious investors are looking to optimise returns in the long run.
- Salaried professionals and millennials are comfortable with online transactions.
You save on commissions, get better returns, and stay in complete control of your investments.
Who Might Still Prefer a Regular Plan?
Despite lower returns, a regular plan may suit investors who:
- Are beginners and need advice.
- Are not confident using online platforms.
- Have complex portfolios requiring a full-service financial advisor.
But even in such cases, consider a fee-based advisor instead of a commission-based distributor. A fee-only advisor charges you upfront and works in your best interest.
The NAV Myth: Why It’s Not the Only Thing That Matters
Some people worry about buying a mutual fund at a higher NAV under a direct plan than a regular one.
But here’s the truth: NAV alone doesn’t determine your returns.
Whether you buy a unit at Rs. 50 or Rs. 60, the percentage growth over time matters. Direct plans grow faster simply because more of your money is invested, while less goes toward commissions.
Switching from Regular to Direct Plan: How to Do It?
Yes, you can switch!
- Log in to the AMC website or use an online platform that supports direct plans.
- Redeem your existing regular plan units.
- Reinvest the same amount in the direct plan of the same fund.
Important Points:
- Tax implications (capital gains tax) may apply when you redeem.
- Exit load may be applicable if switched within the lock-in or exit period.
- A long-term strategy is key—don’t switch frequently.
Despite these minor frictions, switching is generally a one-time cost for long-term gain.
Why Every 1% Matters in Mutual Fund Investing
Mutual fund investing is a compounding game. A 1% difference annually may look small today, but it leads to massive wealth erosion or creation over 10–20 years.
Let’s assume:
- Investment: Rs. 5,00,000
- Return difference: 1% annually
- Duration: 20 years
Future Value:
- Regular Plan (10% CAGR): Rs. 33,64,000
- Direct Plan (11% CAGR): Rs. 39,90,000
Extra Rs. 6.26 lakh just by choosing the right plan. The same fund has a different path.
Choosing the Right Platform for Direct Plans
Many platforms in India offer free or low-cost direct mutual fund investing, such as:
- Coin by Zerodha
- Kuvera
- Groww
- Paytm Money
- MF Central
- AMC websites directly
Always check that the platform is registered with SEBI and offers genuine direct plans with no hidden charges.
Conclusion: Small Decision, Big Impact
Regarding mutual fund investing, choosing between regular and direct plans is more than just paperwork. It’s a silent wealth influencer determining how much money you retain from your hard-earned investment.
Investing through a direct plan keeps more of your money working for you. You’re not paying others to earn from your portfolio.
In the long run, this simple switch could mean lakhs of rupees in additional wealth. So the next time someone says, “I also invested in the same fund,” ask them: Which plan?
The word “Direct” can make a significant difference.
