All mutual funds come in two types- Direct Plan and Regular Plan. Both are the same exact scheme, by the same Fund House, investing in the same stocks and bonds. The difference between the two is that Regular Plan costs you more. In this plan Fund House pays a hidden percentage of commission to your broker. The commission comes out of our investments, though you never come to know of it. In a Direct Plan, no commission is paid to the broker. The investment is done directly with the Fund House and the middle man/ broker is eliminated.
While investing in a mutual fund, we always check the Expense ratio: annual cost of owning the mutual fund. The Expense ratio is always lower for Direct Plans, since no commission is paid out. Rather the savings (the commission that is not paid) is added to the returns of the scheme. This leads to a higher NAV (Net Asset value) of the Direct Plan mutual fund.
You may feel that paying a small amount as brokerage annually does not affect your savings in the long run, but that is not true. Even this small amount of brokerage can lead to massive losses in the long run.
How to invest in Direct Plans?
You can invest in Direct Plans by directly downloading forms from the AMCs (Asset Management Company’s) website and submitting them in their offices. Another way is to use websites like CAMS and Karvy, which allow you to make investments in both type of plans by creating your accounts there and getting the KYC verification done.
Who should invest in Direct Plans?
People who are comfortable with getting all the formalities done on their own, who can visit the branches should go in for Direct Plans. Also you need to do all the research about mutual funds on your own if you are not availing the services of the broker or your investment advisor. If you can manage the above mentioned things, then you must invest in Direct Plans for better future returns.
Author | Akanksha Goel