Back to Basics: How to choose between direct and regular MF plans?

Parv Shah |BL Research Bureau | Updated on: Jul 24, 2022

Direct plans are cheaper and ideal for investors who tracks funds closely

Every MF scheme comes under two plans – direct and regular. Direct plans were brought in for those who didn’t want to incur any extra cost for going through an intermediary. As per data with MF industry body AMFI, currently only 22 per cent of total MF investments of India are under direct plans and hence, the tilt is towards regular schemes. Here is a complete lowdown on direct versus regular MF plans.

Key differences

Before choosing a particular plan for MF investment, investors should look at how regular and direct plans differ from each other. The fundamental difference here is that investment in regular plans is made through MFDs (Mutual Fund Distributors) who take care of KYC submission and providing documents to RTAs (Registrar and Transfer Agents) and AMCs (asset management companies) and other ongoing services. In lieu of these services, fund houses compensate them with a commission and this sum gets accounted for in the expense ratio and, consequently, the Net Asset Value (NAV).

Direct plans are cheaper — lower expense ratio and higher NAV. One can invest in a direct plan either through the respective AMC website or through numerous platforms such as MFUtility, IndMoney, Zerodha Coin, Groww and Kuvera. Don’t worry if the platform through which you have invested shuts down as the money lies at the AMC-end and you can access your investments through MFCentral, MFUtility and RTA websites such as CAMS and KFintech.

The total expense ratio (TER) of regular plans is higher than that of direct plans. For instance, the TER of direct plans of tax-saving MFs is between 0.38 per cent and 1.80 per cent, while that of regular plans is 1.6-2.6 per cent.

A large amount invested for a long period of time under direct plan can generate significantly higher return in absolute terms compared to a regular plan. Consider Canara Robeco Blue Chip Equity Fund whose regular plan has a TER of 1.86 per cent, while direct plan costs 0.38 per cent. If you had invested a lump-sum amount of ₹1 lakh in 2013 (when direct plans were first introduced), under the regular plan it would have grown to ₹3.17 lakh, while the corpus under direct plan would have become ₹3.54 lakh. As you can see, a difference of mere 1.5 percentage points in expense ratio has generated an excess return of ₹36,000 in a span of around nine years. If a SIP of ₹1,000 per month is considered for the same period, assuming expense ratio remains constant, the investment will grow to ₹2.4 lakh under direct plan while the same would be ₹2.21 lakh under the regular plan.

Do keep in mind that there is no difference in the portfolio constituents under both plans. Due to compounding effect, even a small difference at the start grows to a reasonable gap over time.

Points to note
Investment in regular plans is made through distributors
Expense ratios are lower under direct plans, adding to your corpus
Moving to direct from regular attracts exit load and taxes

Is conversion possible?

If you have existing investments in regular plan of a fund and wish to switch to the direct plan of the same fund, you need to offload your existing investments in the regular plan and use the proceeds to buy units in the direct plan. This process of selling existing units and buying fresh units can be done through RTAs, direct AMC portals/apps, third-party platforms, and MFU and MFCentral.

Do keep in mind that moving can come with exit load and tax implications. In case you are selling equity fund units at profit before one year, then short-term capital gains will be applicable. If units are sold at profit after holding them for more than a year, long-term capital gain tax will come into play. In case of debt fund units, short-term capital gain tax is applicable for holding periods of less than three years and for over three years it is long-term capital gain tax. Besides taxes, exit loads may also apply as per specific fund norms.

Ultimately, in terms of cost, switching from regular to direct plan is the same as executing two transactions (selling and buying).

While investments in SoA (Statement of Account) form under regular and direct plans can be sold through multiple means such as MFDs, AMCs and online platforms, one can sell demat holdings only through the broking account as the holdings here are controlled by the DP (Depository Participant) with whom you are having broking account.

What you can do

While starting your investment journey, you can go for regular plan through an MFD who does the operational work and acts as your foot soldier. As and when you gain expertise in MFs, you can keep your existing investments under the regular plan as conversion might attract exit load and tax implications, and make your fresh/incremental investments in the direct plan to earn the excess return.

Choosing a direct plan may not be beneficial for all types of investors. Ideally, expenses shouldn’t be the only factor that you consider while investing. Whether you have enough knowledge to pick the right fund and have the right knowledge to maintain your portfolio are much more critical.

Do note that when you entrust an intermediary to do transactions, there is a risk that the intermediary may not look after your best interests always. Instead, they could facilitate transactions in products where they earn more commission. This applies for regular plans of MFs bought through an intermediary. So, you must weigh the pros and cons of both regular and direct options, before making up your mind.

Published on July 23, 2022
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