Every Mutual Fund scheme offers us two modes of investment which are DIRECT & REGULAR. In this article we will know what both these plans consists, what are the difference between them & to whom these plans are feasible. This article will help an investor of mutual fund to decide for themselves before investing.
DIRECT PLAN – As the name it self says “DIRECT”, in this plan an investor purchase mutual funds directly from the A.M.C/ FUND HOUSE. As there is no involvement of the third party/broker, no commission is payable which reduces the expenses of the scheme hence gives higher return to investor.
REGULAR PLAN – In this plan purchase is done through an intermediary i.e. through broker/ distributor who charges their fees & so it increases the expense for the fund house which is included in expense ratio. These expenses are ultimately charged from investor which decreases the return earned from the scheme.
| PARTICULAR | REGULAR PLAN | DIRECT PLAN | ||
| Third Party Involvement | YES | NO | ||
| Expense Ratio | HIGH | LOW | ||
| N.A.V | LOW | HIGH | ||
| Returns | LOW | HIGH | ||
| Market Analysis | Updated By Advisor | Self Updation | ||
| Investment Advise | Given By Advisor | Self Analysis | ||
The above comparison of Regular & Direct Plan gives us indication that :
REGULAR PLAN in-spite of being costly is best suited for those investor who doesn’t have the knowledge or time to study the market, analyze the pros & corns of investing at right time in the right product according to the need and requirement. These investors should invest through Agents/ brokers who provides correct advice & helps in taking right investment decision.
DIRECT PLAN is suitable for those investor who are capable enough to analyze the market can evaluate their money requirement according to their Goals, having proper knowledge of financial market & its working so that proper decision are taken by themselves.
Let us now see what effect does expense ratio have on returns from investing in REGULAR PLAN & DIRECT PLAN OF MUTUAL FUND SCHEME. When investment is done in lump sum amount
Comparison among three percentage of expense ratio ( 1%, 1.5%, 2% ) is taken up under regular plan v/s return from direct plan. So one can evaluate the extra cost incurred which lead to difference in returns over a period of (5/10/20) years.
ASSUMPTIONS
- LUMP-SUM AMOUNT = Rs 500000
- TIME = 5 Years
- RATE OF RETURN = 12% (after expense common to both regular & direct plan)
| PLAN | DIRECT PLAN | REGULAR PLAN – EXPENSE RATIO | ||
| PARTICULAR | 1% | 1.50% | 2% | |
| RATE OF RETURN | 12% | 11.88% | 11.82% | 11.76% |
| AMOUNT | 5,00,000 | 5,00,000 | 5,00,000 | 5,00,000 |
| TIME | 5 Yrs | 5 Yrs | 5 Yrs | 5 Yrs |
| RETURN AFTER 5 Yrs | ₹ 9,08,348.35 | ₹ 9,02,967.95 | ₹ 9,00,289.52 | ₹ 8,97,618.89 |
| Difference In Return | ₹ 5,380.40 | ₹ 8,058.83 | ₹ 10,729.45 | |
ASSUMPTIONS
- LUMP-SUM AMOUNT = Rs 500000
- TIME = 10 Years
- RATE OF RETURN = 12% (after expense common to both regular & direct plan)
| PLAN | DIRECT PLAN | REGULAR PLAN – EXPENSE RATIO | ||
| PARTICULAR | 1% | 1.50% | 2% | |
| RATE OF RETURN | 12% | 11.88% | 11.82% | 11.76% |
| AMOUNT | 5,00,000 | 5,00,000 | 5,00,000 | 5,00,000 |
| TIME | 10 Yrs | 10 Yrs | 10 Yrs | 10 Yrs |
| RETURN AFTER 10 Yrs | ₹ 16,50,193.45 | ₹ 16,30,702.24 | ₹ 16,21,042.43 | ₹ 16,11,439.36 |
| Difference In Return | ₹ 19,491.21 | ₹ 29,151.02 | ₹ 38,754.09 | |
ASSUMPTIONS
- LUMP-SUM AMOUNT = Rs 500000
- TIME = 20 Years
- RATE OF RETURN = 12% (after expense common to both regular & direct plan)
| PLAN | DIRECT PLAN | REGULAR PLAN – EXPENSE RATIO | ||
| PARTICULAR | 1% | 1.50% | 2% | |
| RATE OF RETURN | 12% | 11.88% | 11.82% | 11.76% |
| AMOUNT | 5,00,000 | 5,00,000 | 5,00,000 | 5,00,000 |
| TIME | 20 Yrs | 20 Yrs | 20 Yrs | 20 Yrs |
| RETURN AFTER 20 Yrs | ₹ 54,46,276.83 | ₹ 53,18,379.61 | ₹ 52,55,557.10 | ₹ 51,93,473.63 |
| Difference In Return | ₹ 1,27,897.22 | ₹ 1,90,719.72 | ₹ 2,52,803.20 | |
As the table clears the difference in return from direct plan & regular plan over a period of 5 /10/20 years. This huge difference in return from investment gives us the reason to think twice before investing.
In this article we have compared one time investment amount (lump-sum), the next article will be comparison of returns if invested in S.I.P MODE .
Author Bio
Very well explained.
Now a days, regular plans are available without any charges in various apps like ET Money, PayTM etc. So, there won’t be any difference in returns right.