Investors in India have two options when investing in mutual funds: Direct Plans and Regular Plans. Both options invest in the same underlying portfolio, but they differ in terms of expense ratios, commissions, and advisory support. Choosing between them depends on an investor's experience, financial knowledge, and need for guidance.
Key Differences Between Direct and Regular Mutual Fund Schemes
Pros and Cons of Direct and Regular Plans
Direct Plan
Regular Plan
Should you go for Regular Scheme or Direct Scheme?
While direct schemes provide cost savings, regular schemes are often the better choice for:
Beginners & Inexperienced Investors: Those who lack market knowledge may struggle with fund selection, portfolio management, and rebalancing.
Time-Constrained Investors: If you don’t have the time to research funds, track performance, or rebalance portfolios, a distributor can handle these tasks.
Emotional Investing: Many investors make impulsive decisions. A distributor can provide rational guidance and prevent emotional investing mistakes.
Retirement & Goal-Based Investing: If you have long-term financial goals like early retirement, professional guidance can ensure you choose the right mix of funds.
Does it make sense to go for a Mutual Fund Distributor over an RIA?
Investors often face a choice between working with Mutual Fund Distributors (MFDs) and Registered Investment Advisors (RIAs). Here’s why someone might prefer an MFD:
Mathematical Analysis: Choosing MFD Over RIA
Let’s compare the costs of choosing an MFD versus an RIA using a sample portfolio.
Assumptions:
Investment Amount: ₹50 lakh
Annual Returns (Pre-Expense Ratio): 12%
Expense Ratio for Regular Plan (via MFD): 1.5% (inclusive of all charges including distributor commission)
Expense Ratio for Direct Plan: 1% (inclusive of all AMC charges)
RIA Fee: 1% of total assets under advisory (AuA), charged separately (excluding GST @ 18%, if not already embedded in the 1%)
Regular Plan (via MFD):
Returns before expenses: ₹50,00,000 × 12% = ₹6,00,000
Expense Ratio: ₹50,00,000 × 1.5% = ₹75,000
Net Returns: ₹6,00,000 - ₹75,000 = ₹5,25,000
Direct Plan (via RIA):
Returns before expenses: ₹50,00,000 × 12% = ₹6,00,000
Expense Ratio: ₹50,00,000 × 1% = ₹50,000
RIA Fee: ₹50,00,000 × 1% = ₹50,000
Total Cost: ₹50,000 (expense) + ₹50,000 (RIA fee) = ₹1,18,000
Net Returns: ₹6,00,000 - ₹1,18,000 = ₹4,82,000
Is DIY investing beneficial over investing via MFD / RIA?
Consider two investors, Amit (DIY Investor using Direct Plans) and Rahul (MFD-Guided Investor using Regular Plans), both investing ₹50 lakh.
Amit, lacking expert guidance, chooses a conservative hybrid fund generating only 9% annual returns.
Rahul, with MFD support, selects a high-growth equity fund yielding 12% annual returns, even after a higher expense ratio.
Portfolio Growth Over 10 Years:
Outcome:
Amit’s portfolio grows to ₹1.21 crore, while Rahul’s grows to ₹1.55 crore, a difference of ₹33 lakh.
Despite paying a higher expense ratio in the Regular Plan, Rahul's superior fund selection and timely rebalancing resulted in an additional 3-4% alpha, significantly boosting his wealth.
Key Takeaways:
DIY investors may save on expense ratios but can suffer from poor fund selection and missed opportunities.
MFDs, despite charging commissions, can help generate higher net returns through better fund choices and rebalancing.
Direct investing is not always the best option, and MFDs are not necessarily bad—they add value where investors lack expertise.
Conclusion
Both Direct and Regular Mutual Fund Schemes have their place in an investor's portfolio. Direct plans work well for knowledgeable, self-sufficient investors, while regular plans provide essential guidance for those who need assistance. Similarly, MFDs are ideal for investors who want investment support without an upfront fee, whereas RIAs cater to individuals seeking a comprehensive financial plan for a fees.
Choosing the right option depends on your financial knowledge, investment goals, and preference for guidance. If professional support can help you avoid costly mistakes and stay disciplined, a regular scheme via a distributor may be a smart choice despite the slightly higher costs.