Regular Plan vs Direct Plan: Why One Costs More, and What You Get

Every mutual fund comes in two versions: a regular plan and a direct plan. You will learn what the difference is, where the extra money goes, and how to pick.

A direct plan costs less. A regular plan includes the cost of a person who helps you.

The same fund, two plans

Both plans hold the same shares and bonds, and have the same fund manager. Only the way you buy, and the yearly cost, change.

Where does the extra cost go?

Every fund charges a small yearly fee called the expense ratio. It is taken from the fund's money every day, so you never get a bill. A 1% fee means ₹1 a year for every ₹100 in the fund.

The regular plan's fee is higher because it also pays for selling through distributors. Many people think the whole gap goes to the distributor. It does not.

• Most of the gap is the distributor's commission. It is paid each year you stay invested, for the help you get.
• A smaller part can cover other selling costs and GST. The split differs from fund to fund, so ask your distributor what they earn. I will tell you for any fund I mention.

Bigger funds often cost less too. SEBI, the market regulator, sets a highest yearly fee for equity funds, and it falls as the fund grows:

These are limits, not the real fee. Many funds charge less, and the rules can change. Check the fee in the fund's own documents.

What the gap does over time

For this example, say the direct plan charges 0.5% a year and the regular plan 1.2%. The gap is 0.7%. On ₹10 lakh, that is about ₹5,000 against ₹12,000 a year, a difference of ₹7,000.

That looks small, but fees come out of money that would otherwise keep growing. Say you invest ₹10,000 every month in a SIP, and the direct plan grows 12% a year. The regular plan grows 0.7% less, so 11.3%. These are examples, not forecasts.

The longer you stay, the bigger the gap. That is why cost matters.

What do you get, and which one suits you?

A regular plan does not earn more. You are paying for help:

• Choosing: turning a goal and a date into a monthly amount and a fund.
• Paperwork: KYC, nominee, forms and the first investment.
• Reviews: a check once or twice a year that you are still on track.
• A calm voice: when the market falls, someone reminds you why you started, so you do not stop your SIP in a panic.

This help does not remove risk. Your fund can still fall in value. I am a mutual fund distributor, so for tax advice, ask a tax professional.

A direct plan can suit you if you are happy to choose funds, do the paperwork and stay calm on your own. A regular plan can suit you if you want a person to guide you. Neither is better for everyone. A regular plan is wasted if you never use the help. A direct plan is wasted if you would stop your SIP the first time the market falls.

Before you invest, ask:

1. Which plan, regular or direct, is this?
2. What is the yearly fee in each?
3. How much commission will you earn from this?
4. What help will I get for it, and how often?

You can also invest in a direct plan without me.

What to remember

1. Regular and direct plans hold the same investments.
2. A regular plan costs more because it pays for distribution, mostly commission. The gap is often under 1% a year, and it adds up over many years.
3. You pay for help, not for higher returns.
4. Pick the one that fits how you invest.

To see how a monthly amount grows, try the SIP calculator. Not sure what a SIP is yet? Start with what is a SIP.

Mutual fund investments are subject to market risks, read all scheme related documents carefully. All numbers are examples, not forecasts. This is a way to think, not advice. Your own situation decides.