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Recently I have observed certain funds on the web are marked as Regular or Direct eg. HDFC Top 200 Dividend or HDFC Top 200 Direct Dividend. What is the difference between the two and their advantage or disadvantages?
- Madhu Sinha
When you invest in a mutual fund's direct plan you deal with the AMC directly, while in a regular plan you invest through a distributor or advisor. AMCs usually pay some upfront fee to agents for their services. Now, investors can avoid paying these commissions and it will translate into more returns every year. The difference in returns is expected to range between 0.50 and 0.75 percent.
In September 2012, Sebi came out with several reforms in Mutual Funds and launching Direct Plans was one of them. Now, every AMC has launched Direct plans which allow investors to invest directly with the AMC without paying the distributor commission.
Existing plans have now become regular plans in which distributor commission is paid. The Direct Plan has a lower expense ratio as compared to existing plans in the same schemes since there is no commission to be paid to the distributor under this plan.
Different expenses of Direct and Existing Plans result in different NAVs for both plans. Investments under the Direct Plan are open to all investors who choose to invest without a distributor.
A scheme's portfolio will be the same for both, Existing plan and Direct Plan. Also, the scheme characteristics such as Investment Objective, Asset Allocation Pattern, Investment Strategy, Exit Load, risk factors, facilities offered and other terms and conditions will continue to be same.
It is obviously better to invest in direct plans for higher returns, but this also requires more hard work from the investor as he has to do the paperwork and choose a suitable fund.
This article was originally published on March 26, 2013.
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