How Direct Plan of Mutual Funds Helps Investors with Greater Returns

If anyone asks me, what is the primary reason why investors are more liking to invest in mutual funds than before? I would answer without a blink, because of “Direct Plan” in mutual funds. Such is its impact that, now almost 50 per cent of retail investors are opting to invest in mutual funds through the direct plan.

It has been the most remarkable investor friendly step taken by SEBI to simplify the investing process as well as, to improve returns. SEBI in January 2013, made it mandatory for all AMCs in India to provide the option of direct plan beside regular plan in mutual funds.

What are the Basic Differences Between Direct and Regular Plan?

The basic differences between the direct plan over regular plan are:

  • It has a lower total expense ratio (TER)
  • Investors have to help themselves in selecting, purchasing and monitoring the fund. Its just like the self-service in a food court

The question is obvious, how the same fund has two different expense ratio?

Its because the expense ratio in regular option includes commissions for brokers and distributors for selling the product. Whereas direct plan involves no distributors or brokers, the saving on commission fees is added back to the returns, thereby, increasing total return percentage over regular options.

What you have read just now is the visible difference, there is a lot more to it, and can be seen only over the course of time. The actual difference in TER in direct and regular plan varies from funds to funds.

Let us take an example, suppose you are investing Rs 10,00,000 in the regular option of a mutual fund at an expected rate of return of 12 % over the next 10 years. The maturity amount will be Rs 31,05,848.

Now, if you have made the same investment in the direct plan, the expected rate of return would be 13 per cent due to the lower TER, the maturity amount will come at Rs 33,94,567.

The difference of 1 per cent extra return in the direct plan has translated to an extra return of Rs 2,88,719, without any effort. This is due to the power of compounding, in which you continue to earn interest in both principal and accumulated interest.

Differences in Returns of Direct and Regular Plan of Popular Large-cap Funds.

Funds NameDifference in Expense Ratio (Regular-DIrect)
5 yrs Direct/Regular Plan Returns in %Difference in Returns in %
ABSL Frontline Equity Fund0.8812.54/11.461.08
ICICI Pru Bluechip Fund0.6413.17/12.121.05
SBI Bluechip Fund0.6014.26/13.131.13
HDFC Top 100 Fund0.5212.09/11.310.78
ABSL Focused Equity Fund0.8312.60/11.431.17

You can see the difference, how a small change in expense ratio is helping investors to achieve greater returns over a period of time.

Are there Any Disadvantages with Direct Plan Option?

Yes, there are some disadvantages with the direct plan of mutual funds.

Such funds are not suitable for every kind of investors, because here you have to do your own research while selection and review of funds. Not every investor possess the requisite knowledge for conducting an analysis of the fund, hence, the probability of selecting the wrong fund is very high.

Second, you have to undertake the hassle of documentation, KYC updation, and purchase of mutual funds on your own through online and offline channels. If you are not well-versed with the systems, it will be very difficult.

Bottom Line

If you clearly understand your requirements and know how mutual funds work, then direct plans are very well suited for investment in mutual funds.

But, if you’re new to the investment world and needs advice on your investments, you should go in for regular option. Because for the sake of 1% extra return, you could ruin your whole investment objective.