Recently there has been a lot of debate around whether to invest in Direct Mutual Funds or Regular Mutual Funds with investors (some informed and some un-informed) have been advocating for Regular Funds while brokers / advisors have been recommending Direct Funds.
Before I present the case from either side, let us first understand in easy language what does each type mean and what is the main difference.
According to AMFI’s (Association of Mutual Funds in India) website:
One may invest in mutual funds DIRECTLY i.e., without involving or routing the investment through any distributor/agent in a ‘Direct Plan’.
OR one may choose to invest in mutual funds with the help of a Mutual Fund distributor/agent in what is termed as a ‘Regular Plan’.
‘Direct Plan’ and ‘Regular Plan’ are both part of the same mutual fund scheme, have the same / common portfolio and are managed by the same fund manager, but have different expense ratios (recurring expenses that is incurred by the mutual fund scheme).Source: https://www.amfiindia.com/investor-corner/knowledge-center/Direct-Plan.html
So, first thing to note is the difference between both the funds is ONLY Expense Ration. Their overall performance is NOT different. The difference is – Regular Funds carry higher Expense Ratio as compared to Direct Funds.
How does Expense Ratio make Direct Funds attractive?
Whether it is Direct Plan or Regular Plan of any Mutual Fund, all have expense ratios (also known as Total Expense Ratio, TER). Generally the difference in TERs of Direct Funds and Regular Funds is 1% per annum. In the below screenshot (taken from moneycontrol.com) the difference between Direct and Regular plans of DSP Top 100 Equity Fund the difference for 1 years is (as of today): 0.5%. For 5 years, the difference in returns is : (50.67% – 47.70%) 2.97%.
Now let us take an example and see how much does this difference in performance amount in value terms over a period of time. For this let us calculate using the above returns for DSP Top 100 Fund.
Using the calculators available on moneycontrol.com, here are the results of each type of the funds (we have assumed SIP of Rs. 10,000 per month in either type of funds and the start date has been considered as 11th November 2015):
DSP Top 100 Equity Fund – Direct Plan – Growth
- Amount invested: Rs. 7,20,000
- Profit Value: Rs. 4,30,821
DSP Top 100 Equity Fund – Regular Plan – Growth
What is the difference between the Profit earned between the 2 plans: Rs. 27,497 (Rs. 4,30,821 – Rs. 4,03,324) in 6 years.
What is better – Direct Plan or Regular Plan?
Now consider the below screenshot from Quora first:
or the following questions…
If you are an informed investor (you know your risk profile, you are confident that the invest you are doing is the best as per your investment goals and risk profile) please do invest in Direct Plans of Mutual Funds. And, if you do not fall in this category, my humble request is to please please please – consult an advisor. Take an informed decision for your investments and if in return for advisor’s advisory service you have to purchase Regular Fund, do not shy away!
The Rs. 27k that you earned less on the DSP Top 100 Mutual Fund (example above) is the fee that you have let that advisor earn for his advisory.
Also consider this:
- Do you have strong knowledge of Markets and Mutual Funds?
- Do you understand your Risk Profile and can you match the funds to your Investment Object + Risk Profile?
- Do you have time enough to research about which Mutual Fund should you invest in? If this is not your main profession, is this the best use of your time (or you could use this time with your family and let advisor earn money for you)?
Do answer the above questions before deciding what is beneficial for you – Direct Funds or Regular Funds.
Note: I am not suggesting that you invest in Direct Funds even if you are NOT using any advisor’s services.