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Should You Switch Your Investment from Regular to Direct Plan?

Highlights

  • Investing in a regular mutual fund scheme but thinking whether switching to a direct plan will benefit you?
  • Well, it will depend on your knowledge, the difference in expense ratio, etc- Read this post and decide correctly

Every mutual fund scheme has two plans to choose from – regular and direct. There are many investors who have chosen regular while some have direct plans. Whether you should switch from regular to direct or not depends on various factors. Before looking at those, let us first understand what regular and direct plans are.

The difference between regular and direct plan is the expense ratio. Expense ratio is the cost which you pay to the mutual fund company for managing your money. The same is adjusted in the daily NAV. Expense ratio is charged to pay for fund management fees, administrative charges, salary cost, distribution cost, registrar fee, trustee fee and AMC profits. Let us understand both regular and direct plans.

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What are Regular Plans?

Regular plans have a higher expense ratio since investment in regular plans is done through a mutual fund distributor or advisor. A part of the expense ratio is paid as commission or brokerage to the distributor for providing advice and other services to his/her customers. In the case of debt funds, the expense ratio for regular plans can range from 0.05% to 2.00%.

What are Direct Plans?

Direct plans have a lower expense ratio since investment is done directly with the AMC or through an RIA (Registered Investment Advisors). RIAs are a type of advisors who do not get any commission from the mutual fund company and are supposed to charge a fee from customers for giving advice and service. The expense ratio in direct plans is lesser by 0.40% to 1.00% than regular plans in equity funds.

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Now the question arises, should you switch your investment from regular plan to direct plan and thereby save on costs?

Well, you should consider these factors before doing so:

Difference in Expense Ratio – You need to first check what is the difference in expense ratio between regular and direct plan in the mutual fund scheme where you have invested. If the difference is not much, say 0.10-0.30%, you can stay put in a regular plan after evaluating the value of advice and service your distributor is providing you.

You can check expense ratios of both direct and regular plans by visiting the AMC website and downloading the factsheet. The factsheet is a document issued monthly by the AMC and has details of all mutual fund schemes managed by that AMC. It also has details of expense ratios for both plans across schemes.

If the difference is higher, say 0.50%-1.00% or more, you can evaluate switching to a direct plan since over a long period it will have an impact on the amount you accumulate from your investments. Here again, evaluate the value addition your distributor is giving you.

Value of Advice and Service – Investors in regular plans are advised by some advisor or the other, it could be a bank relationship manager, individual advisor, digital platform or a NBFC. If you trust your advisor and are satisfied with the quality of their advice and service, you are better off staying in the regular plan.

You should look at the commission being earned by your advisor which is in the range of 0.50-1.00% annually as his earning for providing you services. If your advisor follows a research based methodology, is an expert in the field and you can see outcomes, it is better to stay put in a regular plan.

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On the other hand, if you are able to find a trusted RIA who does not get any commission and the two of you can agree to a fee, you can switch to direct plan.

Your Own Knowledge – The number of mutual fund schemes runs into thousands and there are so many types in equity, debt, hybrid, etc. Then one needs to understand markets, asset allocation, develop a financial plan, choose the right schemes, rebalance portfolio, and many other things.

This could be overwhelming for some people. Acquiring this knowledge is not impossible, but you have to spend time and read to get the know-how. With shortage of time for many of us, it could be difficult to work towards it.

So, if you do not have time or the will, it is better to be assisted by an advisor. If you invest with half-baked knowledge yourself, it is a perfect recipe for disaster. To save that 0.50%-1.00%, you might end up actually losing more in terms of lower returns.

Return Expectations – If your return expectation is not very high and you are happy with market linked returns, direct plans are suited for you. Just invest in an index fund-direct plan and hold it for many years and decades. It will give you the return the market delivers, which could actually be better than most active funds.

However, if you are looking for that extra 3-4% over market returns, you might not be able to do it yourself if you do not possess the right knowledge and do not have time at your disposal.

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It is better to be invested in a regular plan through a mutual fund distributor or avail the services of an RIA and then switch to a direct plan.

Key Takeaways

  • Ascertain the difference in expense ratios in your mutual fund.
  • Evaluate the quality and advice provided by your advisor
  • Understand your own ability to manage your portfolio, do you have the knowledge and time. If not, are you willing to work towards it?
  • Have clarity on your return expectation
  • Based on the above, you can take a call to switch from regular to direct.
  • There is no standard answer, it will differ for every individual.

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