Every mutual fund scheme has two variations to invest – a direct plan and a regular plan.
Asset Management Companies (i.e. Mutual Fund companies) allow investors to invest in mutual fund schemes directly via direct plans as opposed to via agents, brokers or distributors, as is the case with regular fund plans.
Mutual Funds charge you annual management fees for managing your money in their funds. This is known as expense ratio and is usually expressed as an annual percentage for eg 2% per annum. This comes out of your investments only.
Regular and direct plans involve investing in the same mutual fund scheme, handled by the same fund manager who invests in the same portfolio of stocks and bonds.
The only difference is that since investing in regular funds is facilitated by a broker or a distributor, the AMC pays a % of the investment as a commission to the distributor whereas no commission is paid in case of a direct plan.
In other words, the expense ratio or fees is higher in regular plans whereas the expense ratio is lower in direct plans as there is no commission. Lower fees for the same fund means that you get higher returns in direct funds vis-a-vis regular funds.
Let’s see by an example :
Suppose Mr. A invested in Canara Robeco Blue Chip Equity Fund-Direct Plan and Mr. B invested in the regular plan for the same scheme at the same time. Take a look at the returns below.
|Name of Fund||1 year returns(CAGR)||3 year returns(CAGR)||5 year returns(CAGR)||Expense Ratio(CAGR)|
|Canara Robeco Blue Chip Equity Fund-Direct Plan||13.28%||15.32%||12.37%||1.49%|
|Canara Robeco Blue Chip Equity Fund-Regular Plan||11.90%||14.04%||11.15%||2.73%|
As we can see, the returns are higher for direct plans in each time frame by about 1.2% which is roughly the same as the difference in their expense ratios.
So, in short:
Regular plans -> higher fees -> lower returns
Direct plans -> lower fees -> higher returns
Hope, the above helps you! Excited to get on a call with you shortly. 🙂