How The Thin Line Between Regular & Direct Mutual Fund Plans Impacts Your Returns

The last decade or so has seen awareness?around mutual funds rise considerably. Gradually, investors are realising the true potential of mutual funds, especially how they outperform various suboptimal investment options such as gold, bank FDs, PPF, etc. over the long term.?

However,?one aspect of mutual funds that is still significantly unknown to many investors is the option of?direct plans?besides the traditional regular ones. The reason why the regular vs. direct plan comparison is important is because of the impact it has on your fund's?returns.?After all, who doesn't want to earn higher returns, right??

So read on as we compare and?explain the differences between regular and direct mutual fund plans:

Direct Vs Regular Plans: How Do They Differ?

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The?main difference?between regular mutual fund plans and direct plans is the involvement of intermediaries in the regular route. When an investor wants to invest in mutual funds and takes the help of such advisors and distributors, such mutual fund investments are referred to as regular plans. However, when the investor directly purchases them from mutual fund houses and not through such intermediaries, such an investment route is known as a direct plan.

The absence of intermediaries in direct plans leads to a lower expense ratio and thereby higher returns since the investor doesn’t need to pay any form of fee or commission to the distributor or advisor. Due to higher returns and a lower expense ratio, direct plans are also able to provide a higher net asset value (NAV).

Also Read:?How The?Stock Market?Crash Of 1929 Led To World War II

Parameters On Which Direct Plans Outscore Regular Ones

Both regular and direct plans involve the same investment objective, fund management, portfolio composition, investment style, asset allocation, and availability of a choice of SIP, lump sum, and STP modes of investing, as well as dividend or growth options. Direct plans outscore regular plans?by providing higher NAVs and a lower expense ratio. Due to their lower expense ratio, they are able to yield higher returns than the regular plans.

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Also Read:?Debunking?Mutual Fund?Myths

Lower expense ratio

The expense ratio is the percentage of a fund’s total assets being used for expenses such as administrative, fund management, and advertising. For instance, an expense ratio of 1% implies that 1% of that fund’s total assets are used to cover such expenses.

Since direct plans do not involve distributors or advisors as intermediaries, they save on the distribution costs and fees to be paid to them, such as brokerage, commission, etc. This results in lesser expenses for the fund house and, subsequently, a lower expense ratio through the direct plan route. Generally, the expense ratio of direct plans is around 1% lower than that of regular plans.

Higher returns

The?absence of intermediaries enables direct plans to save expenses (such as commission or brokerage to be paid to advisors and distributors) and therefore maintain a lower expense ratio than regular plans.?This saved amount therefore remains invested in your mutual fund and starts generating returns, thanks to the magic of compounding. These returns are higher than those of regular plans due to the savings resulting from the absence of intermediaries.?

Some investors may perceive the difference in direct and regular plans' returns as minimal during the initial years of the investment’s tenure. However, this difference becomes sizeable over the long term when the investor stays invested.?

Higher NAV

Lower operating expenses (and ratio) and higher returns also result in direct plans providing a higher net asset value (NAV) than regular plans. Therefore, the amount saved through the elimination of intermediaries’ expenses leads to additional returns, whose benefit is further passed on to investors in the form of a higher NAV.

Also Read:?How A Science Genius Lost Millions In The?Stock Market

Example To Show The Return Difference

To show the difference in returns when a direct vs. regular mutual fund plan is chosen, here are examples using an online calculator:

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Tabular Comparison

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