Mutual Funds: Direct vs. Regular Plans – Which Option Suits You Better?
While investing in mutual funds, one of the primary choices you face as an investor is between going
for a Direct Plan or a Regular Plan.
Both options give you access to the same mutual fund schemes and underlying assets, but there are
a few key differences in the way they are managed and the fees associated with each.
What is a Direct Plan?
A Direct Plan in mutual funds is one where investors invest directly with the mutual fund company,
without involving any intermediaries, such as brokers or distributors.

Launched in 2013 by SEBI (Securities and Exchange Board of India), Direct Plans enable investors to
avoid the commission fees associated with intermediaries, resulting in lower expense ratios.
Key Features:

• No Distributor Commissions: Direct Plans eliminate distributor commissions, leading to lower
  expense ratios.
• Higher NAV: Lower expenses mean that Direct Plans typically have a slightly higher NAV (Net Asset
  Value) than Regular Plans.
• DIY Approach: Investors need to manage investments on their own, without intermediary
  guidance.
  Who Should Consider It?
  Direct Plans are ideal for experienced investors or those who are comfortable making their own
  investment decisions, as well as those looking to maximize returns over the long term by minimizing
  costs.
  What is a Regular Plan?
  A Regular Plan, on the other hand, is purchased through a broker, distributor, or financial advisor.
  Since there is an intermediary involved, there are additional fees for their services, which are
  included in the fund’s expense ratio.
  The higher expense ratio slightly reduces returns, but investors benefit from the advice and support
  offered by these intermediaries.
  Why do you need advice and support?
  You need advice and support mainly because:
   You need to maximize your returns
   You need to maximise your returns in the least risky way
   You need to know in which fund to invest and when

Key Features:

• Higher Expense Ratio: Regular Plans include distributor commissions, leading to a higher expense
  ratio.
• Lower NAV: Due to the higher expense ratio, the NAV of Regular Plans is usually slightly lower than
  that of Direct Plans.
• Advisor Support: Investors receive guidance, making Regular Plans ideal for those who want help in
  selecting and managing funds.
  Who Should Consider It?
  Regular Plans are suitable for new investors or those who prefer to have professional assistance with
  their investment decisions, as well as individuals who value having an advisor to guide them through
  market changes.
  Comparison of Direct and Regular Plans
  Type Feature
  Regular  Lower expense
  ratio
   NAV higher
   Advisory
  support
   Ideal for
  experienced
  advisors
   Potentially
  slightly more
  returns
  Direct  Higher
  expense ratio
   NAV lower
   No advisory
  support
   Ideal for
  skilled investors
   Potentially
  slightly lower
  returns.
  Advantages and Disadvantages
  Direct Plan
  Advantages:
• Lower expense ratio, resulting in potentially higher returns over time.
• Direct control over investments, appealing to experienced investors.
  Disadvantages:
• No advisory support, which may be challenging for beginners.
• Requires knowledge and confidence to select and manage funds independently.
  Regular Plan
  Advantages:
• Access to advisory support, which can be beneficial for new investors or those with limited time to
  manage investments.
• Easier process, as advisors assist with fund selection and provide guidance based on market trends.
  Disadvantages:
• Higher expense ratio due to distributor commissions, slightly reducing overall returns.
• Investors may become dependent on advisors, potentially affecting their ability to make
  independent investment decisions.
  Impact of Expense Ratios on Returns: A Data-Driven Example
  For a clearer perspective, let’s look at the long-term impact of expense ratios on returns for both
  Direct and Regular Plans:
  Example: Assume an investment of INR 1 lakh in a mutual fund with an average return of 12%
  annually.

Plan Type Expense ratio 10-year corpus (lakh) 20-year corpus (lakh)
Direct 1% 3.12 9.65
Regular 1% 3.01 8.91
The difference may seem small initially, but over long periods, even a slight reduction in the expense
ratio has a compounding effect, allowing Direct Plans to outperform Regular Plans by a significant
margin.
Tax Implications
The tax data on mutual funds for 2024 reflects significant changes brought by the latest Union
Budget in India:

1. Equity Mutual Funds:
   o Short-Term Capital Gains (STCG): Now taxed at 20% for holdings of less than one
   year, up from the previous 15%.
   o Long-Term Capital Gains (LTCG): Now taxed at 12.5% if held for more than a year, an
   increase from the former 10% rate on gains exceeding INR 1 lakh. This could impact
   the attractiveness of equity funds for long-term growth investors.
2. Debt Mutual Funds:
   o Debt funds that do not hold at least 35% in equities are treated as short-term assets
   for tax purposes, regardless of holding period. Gains on these funds are taxed at the
   investor’s income tax slab rate, without the indexation benefits previously available,
   potentially making them less appealing for long-term debt investors.
3. Funds of Funds (FoFs):
   o Taxation for FoFs and international mutual funds now includes 20% on short-term
   gains (holding period less than two years) and 12.5% on long-term gains (holding

period over two years). This aligns the tax structure more closely with equity funds,
providing potential tax savings for investors with a longer holding period.
These changes are intended to simplify tax calculations but may require investors to adjust
strategies, especially those relying on tax efficiency in equity or debt mutual funds.
Which is Better: Direct or Regular?
The choice between a Direct and Regular Plan comes down to your investment experience and the
level of guidance you require.

• Direct Plan: If you are a knowledgeable investor who prefers to handle your portfolio personally
  and maximize returns, Direct Plans offer the advantage of lower costs, which, compounded over
  time, can lead to meaningful gains.
• Regular Plan: If you are new to investing or prefer having an advisor’s support, Regular Plans might
  be a better fit. The additional costs associated with Regular Plans can be worthwhile if you rely on
  expert guidance to navigate complex market conditions.
  Conclusion
  Both Direct and Regular Plans offer distinct advantages, but for long-term investors looking to
  maximize returns, Direct Plans generally emerge as the better choice.
  With a lower expense ratio, Direct Plans allow your money to grow more efficiently over time.
  For investors who are comfortable managing their own portfolios and don’t need regular guidance,
  the cost-saving benefits make Direct Plans highly attractive.
  However, if you value professional assistance and want ongoing support, the Regular Plan can be a
  sensible choice.
  Paying slightly higher fees for the advice and help of an advisor can be especially beneficial for those
  who are new to mutual funds or uncertain about choosing the right funds.
  Ultimately, understanding your own comfort level with investing and your need for guidance will
  help you make a more confident and well-aligned choice.