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Mutual Funds: Regular Vs Direct plans

When we talk about mutual funds, I see a lot of people still confused between regular and direct plans. This is in spite of the pleothora of articles which have already been written around this topic. Many sites/ advisors still recommend people to go ahead with regular plans by mostly using scare tactics. Some of the common points I have come across are:

“Invest in regular plans if you are new to market”

“Direct plans are only for the financial savvy”

“You get expert guidance in regular plans”

“Regular plans are much more convenient to buy”

“Regular plans provide you value added services – managing and tracking funds on your behalf, periodic reviews, etc.”

“Retail investors need guidance”

“Your financial advisor can help you generate higher returns…etc….etc…..”

The reasons are never ending. Frankly, none of the of above is true and people are just trying to mislead the gullible innocent investors and play on their fear. Personal Finance/ Mutual funds are simply not that complex, as people are made to believe.

The direct and regular plans have absolutely no difference other than the fact that in regular plans you end up paying brokerage not one time but everyday as long as you are invested in the fund.

How regular and direct plans work
Regular Vs Direct plans

Whether you make money from the mutual fund or not, you will continue to pay commission to your broker/ bank. Whenever you are buying funds from your bank’s demat account, you are automatically investing in a regular plan. The bank here acts as the broker and enjoys the commission. When you enter a distributor/ investment advisor code while buying the fund, you are again investing in a regular plan.

The best way to work with a financial advisor is to pay him a one time fee for his advisory. Your funds are being managed by the mutual fund house (for which you are already paying a fee). The Govt has mandated that all mutual fund schemes have a direct plan as well (from 2013), hence there is absolutely no reason to pay a regular commission to your financial advisor. Even SEBI guidelines mandate that the financial advisor should only be charging a one time fee.

Also, when investing in direct plans through a financial advisor, your interests are aligned as well. The advisor will suggest only the best schemes as per his knowledge so as to not lose you as a client for future dealings. In case of regular plans, the advisor can always be biased towards suggesting a plan which provides him with a higher commission (in many cases it is more than 1% per annum).

Let us take a look at the difference which a regular plan Vs a direct plan can make in your returns:

Illustrative returns from a regular plan
Low returns from a regular plan

Investment of INR 1 Lakh for a period of 15 years under a regular plan with commission outgo as 1.25%. Assume post management fee return of 12%. The calculations have been simplified and approximate just to give an idea. Actual calculation will vary slightly.

Same investment under a direct plan would have generated substantially higher return:

Returns from direct plans
Comparative returns from Direct plans

Net absolute return under regular plans is 253% whereas under direct plan it is 347%! The commissions you saved also keep compounding thereby generating a massive difference. Often many articles fail to recognize the benefit of compounding on commissions saved.

As stated previously, in regular plans the broker would continue to get commissions irrespective of whether you are making a profit or incurring a loss.

I simply see no reason why anyone should invest in a regular plan. It is much more prudent to pay a (one-time) advisory fee to your broker/ advisor than paying regular commissions to him year on year.

Also, investing in mutual funds does not need you to be a financial expert. Some basic knowledge and understanding of equity markets and common sense is all that is needed to make good decisions. This basic knowledge you should anyways have whether you are investing through directly or through an advisor. Surely, you can leave everything into the hands of your broker/ advisor and trust him blindly.

The performance of various mutual funds does not vary significantly from each other and very few advisors actually make the effort to understand the asset quality of mutual funds which could actually help generate better returns. Start following the mutual fund’s manager, his/her interviews, articles, etc and you will soon come to know his investment style which will enable better investment decisions.

(Disclaimer: These are my personal views only. This article is meant for educational purpose only. The calculations used/ assumptions taken are for illustrative purpose only). If you liked this article, do subscribe below to get updates on new posts.

Would really appreciate if you could leave your comments or feedback. Would love to hear any counter-arguments as well.

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