If you remember investing in mutual funds more than 10 years back you would still remember that there was a huge commission that was paid upfront to the distributor, which at times was as high as 1.5-2.0% of the funds raised. While this was never disclosed explicitly in your factsheet, the payout was reduced from the corpus and therefore your NAV stood reduced to that extent. Effectively, that was a cost that was forced upon you irrespective of whether the broker in question gave you any service or not.
Things however changed after 2009 when SEBI barred the payout of upfront commissions to brokers in the form of entry loads. Brokers, were however, free to charge the client directly for any services rendered to them as advisory fee. But it was only post January 01st 2013 that there was a clear demarcation between Direct Plans and Regular Plans. What is the difference between regular and direct plan in mutual funds and how does regular plan to direct plan compare in reality. More importantly, is there a direct plan vs regular plan calculator that gives out a clear picture of the difference.
Regular Plan and Direct Plan of Mutual Fund compared..
Post January 2013, all mutual funds are required to classify the same fund scheme under two categories viz. Direct Plans and Regular Plans. The regular plans are those in which the distribution expenses and trail fees are charged to the NAV of the fund and paid to the distributor. This is exactly the system that funds were following before. On the other hand, the direct plan does not pay distribution expenses or trail fees to the broker and to that extent the load on the direct plan is lower. That is why you will find that the NAV of the direct plan is always higher compared to the regular plan of the same fund.
How do you apply for a direct plan? When you submit the MF application form or the MF SIP form to your mutual fund office, you need to clearly mention in the distributor column that it is a direct application. Once it is registered as a direct application, the direct plan NAV is automatically applicable to you. Let us understand with some key data points of how the NAV, sale price and repurchase price differs for direct plans versus regular plans.
Name of SchemeScheme TypeNAVRepurchase PriceSale PriceMOST Focus 25 – GrowthRegular20.414320.210220.4143MOST Focus 25 - GrowthDirect21.863621.645021.8636HDFC Balanced Fund – GrowthRegular146.7650145.2970146.7650HDFC Balanced Fund – GrowthDirect153.6540152.1170153.6540DSP Bond Fund – GrowthRegular54.762654.625754.7626DSP Bond Fund - GrowthDirect56.570356.428956.5703
Source: AMFI India
The above table captures the NAVs of 3 funds from equity, balanced and bond funds along with their sale price and the repurchase price. As can be seen from the above table, due to the absence of upfront commissions to distributors, the NAV of the Direct Plan is always higher than the regular plan. It, however, needs to be remembered that only the upfront commission and trail commissions are exempted for the direct plans. These direct plans have to take on costs like statutory charges; transaction costs etc and the same will get adjusted to the NAVs. However, since the direct plans save on upfront commissions and trail commissions, their NAVs tend to be higher and therefore returns also tend to be higher. But, how much of a difference does the direct plan to your returns.
How the direct plan versus regular plan impact your wealth creation?
Let us assume that the investor does a SIP allocation of Rs.10,000 per month in each of the above 6 different plans as above and carries it for 5 years. We have only considered data after Jan 2013 as the direct plan NAVs were separately available only from that date. Check the table below..
Name of SchemeScheme TypeActual InvestmentAccumulated CorpusImplied Return (%)MOST Focus 25 – GrowthRegular5,80,0008,13,00414.21%MOST Focus 25 - GrowthDirect5,80,0008,44,71015.85%HDFC Balanced Fund – GrowthRegular5,80,0008,55,10516.37%HDFC Balanced Fund – GrowthDirect5,80,0008,79,81917.60%DSP Bond Fund – GrowthRegular5,80,0007,06,1558.23%DSP Bond Fund - GrowthDirect5,80,0007,16,8318.86%
Source: Value Research
We have only considered a 58 months period for all the funds to make them comparable as Direct Plan data is only available since early 2013. It can be seen that in case of equity and the balanced fund, the difference in annualized returns is around 150 basis points due to shift to direct plans. In the case of the bond fund the advantage of a direct plan is around 60 basis points. However, this is over a 5 year period. As you sustain this advantage over 15-20 years, this difference should get more pronounced.
What should opt for - Direct plan or Regular plan?
The choice is quite simple; if you are looking at your broker for value added advice and for helping you plan your asset allocation the ideally go for a regular plan through a broker. In that case the upfront commission should not really matter to you. However, if you are self-driven investor then you can opt for the direct plans as the difference in yield will be meaningful to you over the longer term.