Direct or regular, which plan is better for you?

When you choose to invest through mutual funds, you have two options for investing, Direct Plan and Regular Plan. Both schemes are the same, but you can invest in them in two ways. Let’s understand what is the difference between the two and which is better for you.

What are Direct and Regular Plans?

In a Direct Plan, an investor can invest directly in a mutual fund scheme without any distributor or agent. On the other hand, in a Regular Plan, investment is made in a mutual fund scheme with the help of a distributor or agent.

What are similarities in both types of investments?

Direct Plan and Regular Plan are two options available for the same mutual fund scheme. It’s like having two different variations of the same plan.  The scheme, portfolio, and fund manager are the same.

Let’s look at difference between Regular and Direct. Through both Regular and Direct, you invest in the scheme. The only difference between Direct and Regular is regarding expense ratio, i.e., the expenses incurred on these.

Compared to the Regular Plan, the expenses in Direct Plan are lower. That’s because Direct Plan does not require a distributor or agent.

In a Direct Plan, there is no need to pay commission to brokers and distributors. Therefore, its annual cost, i.e., the expense ratio is lower.

The expense ratio of a Direct Plan is between 0.6% to 1%…While the cost of a Regular Plan ranges from 1.7% to 2.44%.

Let’s look at growth in Direct Investment. Lower cost on Direct Mutual Funds means that higher portion of investor’s capital will go be infused in investments and less amount will be leaked in the form of commission.

This option is being choose more.

As per Mutual Fund industry organisation AMFI’s data, in February 2023, around 20% of the country’s retail investors invested directly in mutual funds. This figure increased to 23% in February 2024. Hence, there is annual growth of 15% in direct investments by retail investors.

How to Invest?

In the Direct Plan of mutual funds, investment can be made through the AMC’s website, stock exchange platforms, Mutual Fund Utility (MFU), or online platforms of digital channels.

Many fintech companies in the market are now offering platforms for investing in Direct Mutual Funds. Some are providing this facility for free, while others are charging a fee.

How secure is the Investment?

So, how secure is investment in the Direct Plan?

Most online investment platforms that provide this facility are registered with SEBI and fall within the ambit of the regulator’s rules. They have to adhere to SEBI’s policies related to privacy and security.

Currently, most platforms are being managed by startups. It is possible that in the future, some platforms may shut down or be acquired by larger companies.

But investors should not worry because if a platform closes for any reason in the future or if another company acquires it, your money will still be safe with the mutual fund company.

Every fund has a registrar. These registrars, appointed by SEBI, will keep an eye on your investment.

SEBI’s Framework

To ensure investment security, SEBI introduced a new framework in June 2023. Under this, platforms offering Direct Investment services will have to apply for Execution Only Platform (EOP). In the Direct Plan of mutual funds, EOP refers to such digital or online platforms that provide subscription, redemption, and switch facilities for mutual fund schemes.

Online investment platforms operate under the purview of SEBI as either stock brokers or Registered Investment Advisors (RIA) which offer investors the ability to buy and sell mutual fund schemes.

Under the rules of RIA, investors who buy and sell mutual funds without any advice do not get security from risks associated with online platform transactions.

Keeping this in mind, SEBI has stated that EOP can get registered with AMFI and they can work as agents with AMC, They will be classified as Category-1. Or they can work as agents to investors, registered with SEBI as stock brokers, they will be classified as Category-2.

So, who should invest in mutual funds’ direct plan?

Hemant Rustagi, CEO of Wiseinvest, says that after the framework for Execution Only Platforms (EOPs) is in place, investing in mutual funds’ direct plans has become quite safe.  EOP investors are now being provided with facilities for cyber security, technology, and lodging complaints.

In the future, features and facilities related to direct plans will increase. If you understand mutual funds, you can invest in direct plans, that is direct plans are a better option for experienced investors who do not need distributors or financial advisors.

If you do not understand the details of mutual funds, then you should invest through a distributor.

Returns

Due to lower costs in mutual funds’ direct plans, returns are higher compared to regular plans. Long-term investors benefit from this. However, to invest in direct plans, you should have good knowledge about mutual funds.