Regular Funds vs Direct Funds

Mutual funds comes in two variants - Direct plans and Regular plans. As an investor which plan is best suited for you?  How both the plans are different?  Which plan gives higher returns? There may be many more questions in a investor's mind. I will try to answer these questions but first lets try to understand direct plans.

What are direct plans ?

In simple words, if you purchase the plan directly from AMC or Mutual fund house it is a direct plan. There is no broker or mutual fund agent between AMC and you. It's like directly purchasing the goods from a manufacturer rather than a retailer. Banks offering mutual funds are distributors and not AMCs, they earn commission from selling mutual funds and they will always sell regular funds.

Direct plans are in effect from 1st January 2013. You can visit AMC website and invest in direct schemes without involving any broker or mutual fund agent. NAV of direct plans is different from the NAV of regular plans but the underlying shares and securities in which a mutual fund invests are same and in same percentage for both direct and regular fund.

For example:- There are two variants of below mutual fund. If it is a direct plan it will be mentioned in the name of the plan. If not then it is a regular plan.

• Birla Sun Life Frontline Equity Fund - Direct Plan
• Birla Sun Life Frontline Equity Fund

There are pros and cons of both plans, direct as well as regular. A direct plan may suit you but not your friend. It totally depends on how well you understand mutual funds and how much you are ready to Do It Yourself ( DIY).

How direct plan differ from regular plan?

Direct plans can be distinguished from regular plans on the basis of different parameters.  Let's discuss the similarities and differences between these plans.

1. Expense Ratio and commission charges

First try to understand what is expense ratio. Expense ratio refers to the annual percentage of fund's assets that is paid out as expenses. These expenses include management fees, marketing fees, operational costs and distribution fees. Let's say a mutual fund scheme has assets of Rs.100 crore and expense ratio for this scheme is 1%. It means that this scheme or fund has expenses of Rs. 1 Crore. Since, these expenses can change and hence the expense ratio.

As i have mentioned, direct plans does not involve any broker or distributor. So, there is no commission to be paid to any intermediary. These commissions are paid to brokers to promote and sell their schemes. These commissions contribute a large part of expense ratio of the funds.

Expense ratio for Direct plans is always lower than the expense ratio for the regular plans as there are no commissions for direct plans to be paid. Management fee and operational cost are still there for direct plans. Fund manager needs to be paid to manage your fund. The only and the major difference is of the commissions paid to the distributors. 

Typically expense ratios for direct equity funds are lower by 0.50% to 1.50% and for direct debt funds expense ratios are lower by 0.10% to 1%. In this way direct funds are better than regular funds. Here is an table to understand the difference.

	Fund Name	Fund Type	Regular Plan Expense Ratio	Direct Plan Expense Ratio	Difference in Expense Ratio
	Birla Sun Life Frontline Equity Fund	Equity: Large Cap	2.07%	0.96%	1.11%
	DSP BlackRock Focus 25 Fund		2.46%	1.70%	0.76%
	ICICI Prudential Focused Bluechip Equity Fund		2.12%	1.13%	0.99%
	Birla Sun Life Short Term Fund	Debt: Short Term	0.29%	0.19%	0.10%
	Franklin India Low Duration Fund		0.78%	0.44%	0.34%
	ICICI Prudential Short Term Fund		1.22%	0.35%	0.87%
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2. NAV

The net asset value (NAV) of direct and regular fund differs because of the variation in expense ratios. The NAV of direct plan is relatively higher when compared to regular plans. This does not mean that direct plans are expensive. This is because the commissions  are to be paid in regular plans and they are paid from investors money, hence, reducing NAV of regular plans. It also means that direct plans give better appreciation to your investment. 

If someone says that NAV of regular fund is less and will give better returns than direct fund, then he is trying to fool you for his own benefit. He is trying to earn commission rather than selling you what is best for you. Higher NAV or lower NAV is no means to check the returns. Returns are never in absolute terms, they are always in percentage.

For example, NAV of  Birla Sun Life Frontline Equity Fund regular plan is Rs. 205.12 and that of direct plan is Rs. 213.69.

    

3. Financial Advice

Performance of mutual funds varies quite a lot and the choice of which fund to invest in is critical. The plan (regular or direct) is a secondary consideration. The choice of a good fund vs a poor fund could lead to a difference of as much as 4-5 % in return over time. Mutual fund advisor can help you choose best performing regular funds.

You need to do the paperwork for your investment and track your portfolio. You need to review your portfolio and re-balance your portfolio. An advisor can help you with these and it can help you earn extra 1-2% return over time. In this way regular funds with a good advisor are better than direct funds. If your advisor is not tracking your portfolio than it is waste.

   

4. Returns 

Due to lower expense ratio direct funds generate higher returns when compared to regular funds. Reason is simple, extra expenses lowers (regular) fund's NAV and therefore appreciation is less. Ratings of some direct funds is better than that of its regular fund. Extra rating for direct fund means that it is a better performer than its regular fund. 

Its important to note that investment objective and the investment mix of the scheme portfolio is same for both direct and regular funds. Fund manager and operational team is also same. Underlying securities and their percentage is also same. Difference is of the commissions paid and hence returns.

Direct funds will always give you higher returns, even a marginal difference of 1% can make a huge difference in long term. Let's compare the returns by some regular and direct plan funds. In the below table you can see how direct funds out perform regular funds.

	Fund Name	Fund Type	Regular Plan 1 Year Returns	Direct Plan 1 Year Returns	Difference in Returns
	Birla Sun Life Frontline Equity Fund	Equity: Large Cap	18.52%	19.71%	1.19
	DSP BlackRock Focus 25 Fund		17.48%	18.34%	0.86
	ICICI Prudential Focused Bluechip Equity Fund		17.91%	19.01%	1.10
	SBI Small & Midcap Fund	Equity: Small Cap	32.70%	34.14%	1.44
	DSP BlackRock Micro Cap Fund		28.66%	29.42%	0.76
	Franklin India Smaller Companies Fund		24.38%	25.96%	1.58
	Birla Sun Life Short Term Fund	Debt: Short Term	9.09%	9.20%	0.11
	Franklin India Low Duration Fund		9.95%	10.30%	0.35
	ICICI Prudential Short Term Fund		9.61%	10.48%	0.87
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Should i invest in direct or regular plan ?

If you are a diligent investor with deep knowledge, meaning that you can pick and track your own mutual funds, then the direct plan is better. The advisor provides no extra value and does not deserve their fee. For most people, however, relying on someone's recommendation is the only option.

If that person or advisor knows what they are doing and are not being influenced by other factors like the commission they earn, you will get good service and potentially earn more on your investments vs what you could have done on your own. In that case, the advisor has earned their fee and investing in a regular plan would be better for you.

Happy Investing!!!