Direct and Regular Plan Mutual Fund Expense Ratio Comparison- Expense Ratios: regular & direct plan

Direct and Regular Plan Mutual Fund Expense Ratio Comparison– Expense Ratios: regular & direct plan.

Each Mutual Fund scheme be it equity or debt has two plans on offer, direct and regular plan. The direct plan cost is lower than the regular plan to the extent of commissions paid to distributors. In both the cases, you are buying into the same portfolio but at different costs.

What is a direct mutual fund plan? How does one benefit from a direct mutual fund plan? And compared to regular plan, which is better direct or regular?. we are giving answers below with examples.

Direct and regular plan

Expense ratio matters as it takes away from your overall return. The higher the expense ratio, the lower will be your net return. The objective of choosing the direct plan is to benefit from lower costs, but what if this cost itself increases substantially? You could, alternatively, choose a similar scheme with lower expenses. If the gap between the direct and the regular plan drops too much, it makes sense to opt for a distributor offering value-added services.

Just sharing for reference.

Expense Ratios: regular & direct for a few Franklin Templeton funds.

This info from Literature

Fund Literature -> Fund Factsheets -> Oct-2017

Expense ratio in % per annum.

Fund Name Regular Direct Diff
Bluechip FIBCF 2.23 1.32 0.91
Taxshield FIT 2.37 1.30 1.07
Index Fund FIIF 1.08 0.67 0.41
Smaller Companies Fund FISCF 2.42 1.18 1.24
Ultra Short Bond Fund FIUBF 0.43 0.34 0.09

A 1% is Rs1000 extra per lakh per year. If you have a Rs 10 Lakh portfolio, all in the regular plan, you’re paying extra between Rs9100 and Rs12,400 to the agent/distributor/broker/bank per year.

Which Plan is better – Direct or regular plan?

From above explanation, definitely direct plan is better, as ultimately it impacts on the ROI (return on investment), which becomes higher due to less cost annually.
However, the comparison is not that simple. In a way, the difference is like a fee you pay to your doctor, lawyer or CA for their professional advice. Where you also have an option of going on your own thru self-use websites, with zero or fraction of the cost. Whether you should pay that fee or not depends on the investor’s own capability and the quality of service you get.

What should you choose between Direct and Regular Plan?

For long-term investors, just as returns compound, annual costs also compound. This is the advantage of well-priced direct plans—they give self-guided investors a return boost. However, if competitiveness makes the gap between direct and regular expenses too low then the benefits of having a distributor to assist with investments can overshadow the cost saving in a direct plan.

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