For those of you who have just started reading up about investing in mutual funds, common terms you may have come across are Direct Plan and Regular Plan. This blog post talks about what direct plans are, what regular plans are, the difference between the two, and which one is better for you.
When you invest money in mutual funds with the help of your bank, a friend, a relative, a neighbor, or an acquaintance who is an AMFI – registered Mutual Fund Distributor, you are essentially investing in a Regular Plan, and the person assisting you with the investment is acting as a broker.
This means, every time you invest money in an equity fund with a Regular Plan, you shell out an expense ratio of 2% to 2.5% of the investment amount. The broker in question ends up getting 1% to 1.5% of this amount.
This same expense ratio comes down to 1.25% to 1.5% in case of Direct Plans. Here, the firm or individual assisting you does not take any money from you in the form of brokerage. A saving of 1.5% every year in commissions is huge!
To cut a long story short, a Direct Plan allows you to earn more money than a Regular Plan by cutting out middlemen commissions or brokerage fees.
The table below gives a clear picture of how much more you earn when you invest in mutual funds with Direct Plans.
Difference Between Direct and Regular Plan in Mutual Fund
|Plan||Amount Invested ~||Duration (years) ~||Annual Rate of Return ~||Expense Ratio (Equity Fund) ~||Total Returns (₹) ~|
|Regular Plan||5,00,000||25||15%||2.5%||95 Lakhs|
|Direct Plan||5,00,000||25||15%||1.2%||1.25 Crores|
When you invest ₹5,00,000 for a period of about 25 years at an estimated 15% annual rate of return in an equity mutual fund using a Direct Plan, you end up earning around ₹30,00,000 more than you would with a Regular Plan, for the same mutual fund.
If you invest the same amount using a Regular Plan, over a period of about 25 years, your broker (the AMFI-registered Mutual Fund Distributor who helped you invest) could end up earning around ₹30,00,000, which could otherwise have been yours.
There are many Mutual Fund Investment Apps out on the market today that let you invest your money quickly and paperless; but in fact, quite a few of them actually sell you costly Regular Plans.
The Tarrakki App on iOS and Android for Wealth Management enables you to invest your hard-earned money in the right Mutual Funds, using Direct Plans. In the long run, Tarrakki truly takes you Towards Prosperity!