Regular and direct plans are two kinds of mutual fund plans. Each of them has its specialties.
Once upon a time, two friends named Richard and Mark decided to go on a journey to a nearby village. They had to choose between two different roads to reach the village. Richard favoured the shorter route. But Mark wanted to take the longer, scenic road.
As a compromise, they split up and took their preferred routes to meet in the village. Richard arrived first and found his journey dull and Mark arrived later and was happy with his decision. Because he had a fascinating experience. When they met, Richard regretted his choice, while Mark was excited to share his experiences with Richard.
You can achieve your long-term financial goals through mutual funds. But you will have to select between regular plans and direct plans for your investment. You should be aware of how these two plans work and how they can affect your returns.
Meaning of regular and direct plans
Regular plans are the traditional way of investing in mutual funds. In this plan, you can purchase mutual fund units through intermediaries such as brokers or bankers.
Direct plans provide a cost-effective way of investing in mutual funds. In direct plans, you can purchase mutual fund units directly from the fund house without involving any intermediaries.
Differences between the plans
Expense ratio
The primary difference between regular and direct plans is the expense ratio. The expense ratio is the percentage of the investment amount that is deducted as a commission by intermediaries in regular plans.
In direct plans, there are no intermediaries. Hence the expense ratio is lower. The lower expense ratio will result in higher returns over the long term.
Impact on returns
In the long run, the expense ratio can have a substantial effect on your investment returns. Because, as time passes, even small fees can accumulate and compound, ultimately resulting in a significant reduction in overall returns.
For example, two investors named Jack and Simon decided to invest Rs. 1,00,000 each in a mutual fund with an expected return of 10% per annum. Jack chose the regular plan, which has an expense ratio of 2.5%. Simon selected the direct plan which has an expense ratio of 0.8%.
After 20 years, Jack will have a corpus of Rs. 4,09,135 and Simon will have a corpus of Rs. 7,04,163. This difference of Rs. 2,95,028 shows the significant impact of the expense ratio on the investment.
Role of a financial advisor
Direct plans are for do-it-yourself (DIY) investors. They do not need the help of financial advisors in transactions. You can use online investment platforms through mobile apps for transactions in direct plans.
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It is important to evaluate both plans and choose the one that best suits your financial goals and preferences. You should devote more time to monitoring the performance of your investment and take appropriate actions when required.
Trust your dreams and follow the right path. Eventually, you will be at your desired destination. A more challenging road may be more rewarding and enjoyable in the end, even if it requires more effort and patience.
