Which Costs You More: Direct Plan Or Regular Plan
Dalal Street Investment Journal|June 10, 2019

When you think of investing in mutual funds, you can opt to buy the same fund in a direct way or the regular way from the IFA. However, as these days direct plans are being marketed as superior to the regular plan, which they indeed are. DSIJ unveils how direct plans actually fair when compared to regular plans from IFAs.

Which Costs You More: Direct Plan Or Regular Plan

The Securities and Exchange Board of India (SEBI) had directed fund houses to launch a direct version of the funds in the year 2013. Since then, you can see that a fund has two plans. One being the 'Direct' and other being the 'Regular', which is purchased through distributors. Direct plans remain the favorite of institutional investors, while the retail investors are still wary of investing through a 'Direct' plan. As of April 2019, the total AUMs (Assets Under Management) of the mutual fund industry stood at 25.28 lakh crore. The 'direct' mode constitutes 41 percent of the total assets of the mutual fund industry, which constitute both institutional and retail. Most of this comes from institutional investors. A large proportion of direct investments were in non-equity oriented schemes, where institutional investors dominate. Our analysis shows that less than five percent of the total assets of MFs are invested by retail investors in equity-dedicated funds. This shows that the direct plans still have to find acceptance among the retail investors, despite its benefit over the regular plan. One of the reasons for such a lower penetration of direct plan among retail investors is the lack of awareness among retail investors.

When it comes to direct plans, the intention of SEBI was to lower the transaction cost, bring more transparency and reduce chances of misspelling. The direct fund was mainly focused on offering knowledgeable and sophisticated investors a low-cost product. As direct plans do not involve any commissions whatsoever, these plans have a lower expense ratio than the regular plans, which consider the agent's commission in the expense ratio. Though SEBI has taken various initiatives with respect to the advertisement codes and sponsorships, there is still a need to think on various loopholes that come with direct plans.

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