Mutual Fund Investing- How investing in direct plans can enhance your returns?

If you go to any mutual fund website- you will see the same MF listed under “Regular Plan” and “Direct Plan”. So you have a  ICICI Pru Discovery Fund- Direct Plan and ICICI Pru Discovery- Regular plan. So what exactly is the difference between the two plans and which one should you invest in?

  • If you look at their equity portfolios, both regular plans and direct plans have essentially the same stocks.
  • The only difference is between their “expense ratio” which is like a fund management fee that the mutual fund charges from its investors. This ranges from 0.5 to 3% for many equity funds.
  • Direct plans are funds that you buy directly from the mutual fund  company without the intervention of any MF distributor/agent whereas regular plans are the plans where  a part of your investments goes as “commissions” to the MF agent/bank/broker.
  • Direct plans have lower expense ratios as compared to regular plans, thereby enhancing your returns by 0.5-1.5% in many cases. Take an example of ICICI Pru Discovery Fund that we talked about. The expense ratio of direct plan is 0.88% whereas that of regular plan is 2.16%- a difference of about 1.25% per annum.  As a result direct plan has a 1 year return of about 1% whereas regular plan has a 1 year return of -0.25%. This is the money going into the pocket of your agent/advisor.
  • So if you are DIY investor who knows which funds to buy, then you should definitely buy direct plans . If you are KYC compliant, you can buy directly from MF websites. If you first time investor, get yourself KYC complaint first .

We always recommend that you hire an investment advisor and pay him separately for portfolio management rather than paying unnecessary commissions on regular MF plans. Buying regular plans encourages MF agents to churn your portfolio more frequently as their incentive comes from extra commissions!

If you have any questions regarding MF investments, feel free to contact us. We construct efficient portfolios based on direct MF plans and diversify using asset allocation techniques rather than buying and selling 25 different schemes in the portfolio.

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