Investing in mutual funds? Know the difference between Direct and Regular plans before you invest..

With the stock market back on track, discussions around mutual funds and SIPs (Systematic Investment Plans) have resurfaced, and people are investing heavily. You, too, might be allocating ₹2,000–₹4,000 from your monthly salary into a mutual fund or an SIP. But have you ever checked whether the mutual fund you are investing in is labeled as "Direct" or "Regular"? Do you know the difference? If you haven’t checked, you should—because this small distinction could cost you lakhs of rupees over the next 15–20 years.

To begin with, any mutual fund scheme offers two types of plans: "Direct" and "Regular." Both are managed by the same fund manager, and the capital in both is invested in the same set of companies within the stock market. Yet, when it comes to returns, those who opt for the "Direct" plan end up with more money than those in the "Regular" plan. The reason for this lies in the presence of an intermediary—a middleman—and the commission they earn.

What is a "Regular Plan"?

A "Regular Plan" refers to a mutual fund investment made through an agent, bank, broker, or distributor. These intermediaries assist you in selecting a fund, help with filling out forms, and provide investment-related advice.

The downside is that these agents do not work for free. The mutual fund company pays them a substantial commission annually, calculated based on your investment. Crucially, this commission is not paid by the fund company out of its own pocket; instead, it is deducted from the money you have invested. Consequently, your overall costs are higher.

What is a "Direct Plan"?

A "Direct Plan" refers to an investment made by bypassing all intermediaries—such as agents or brokers—and purchasing the fund directly through the mutual fund company’s website or via direct investment platforms (like Zerodha Coin, Groww, Upstox, etc.). In this case, you conduct your own research and invest your capital directly with the fund company. The advantage is that since there are no intermediaries, you do not have to pay any commissions. Because there are no commissions, the expense ratio is significantly lower, ensuring that the entire portion of your money is invested in the market.

Understanding the Expense Ratio
The expense ratio is a fee charged by mutual fund companies for managing your money. For instance, suppose a fund delivers a 12% return over a year. If you are invested in a 'regular plan' with an expense ratio of 1.5%, your actual return would be 10.5%. Conversely, if you are in a 'direct plan' with an expense ratio of 0.5%, your return would be 11.5%.

How does a 1% difference lead to a loss of lakhs?
Consider a scenario where you invest ₹10,000 every month through a SIP for 20 years, bringing your total investment to ₹24 lakh. If you choose a regular plan—assuming an annual return of 11%—your total corpus after 20 years would be approximately ₹86.4 lakh.

However, if you opt for a direct plan—assuming an annual return of 12%—your total corpus after 20 years would be approximately ₹99.9 lakh. Due to that 1% commission, you end up incurring a substantial loss of about ₹13.5 lakh.

Which plan is right for you?
If you have a basic understanding of the stock market and mutual funds, and are capable of conducting your own research online to select quality funds, you should always opt for a 'direct plan.' Do not pay your money to intermediaries.

If you are a complete beginner—unfamiliar with terms like 'large-cap' or 'small-cap'—lack the time to conduct research, and require professional guidance at every step, then you may consider a 'regular plan.' In this plan, you pay a portion of your returns as a commission in exchange for the investment advice you receive.
How can you check which type of fund you have?

Check your mutual fund statement (CAS) today, or open your investment app. If the name of your fund ends with "Direct – Growth," you are on the right track. However, if it says "Regular – Growth," be aware that a portion of your earnings is going into someone else’s pocket as a commission every year.

Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.