Indian retail Investors are not able to differentiate between regular and direct plan for investing in a mutual fund and so let me explain what it means and when you should be using which one.
A very interesting question about mutual fund plans.
I wanted to purchase an ELSS fund and have read your article about dividend based tax saving but I also observed few funds offer a direct option which is different from growth and dividend option which your article discusses. What is it and how it is different from others?
Most Indian retail Investors are not able to differentiate between regular and direct plan for investing in a mutual fund and so let me explain what it means and when you should be using which one.
SEBI is constantly reforming norms for mutual fund investment and eradication of entry load in July 2010 was one of them which led many brokerage houses to loose on revenue. So in September 2012, SEBI came out with yet another reform in which mutual fund houses pay the brokerage houses a fees (known as distributor commission) which is added to the fund as an expense to the fund and is part of expense ratio.
Every existing fund plans become regular plans and every fund house is coming up with a new direct plan where the distributor commission is not being paid and investors can invest directly with the fund house.
So ideally every fund will have 4 investment options.
- Direct Plan Dividend Option
- Direct Plan Growth Option
- Regular Plan Dividend Option
- Regular Plan Growth Option
You can get the NAV from AMFIIndia for each of the above choice.
And quite clearly Direct plan will always have better NAV than regular plans because of lesser expense.
Should you go for Direct Plan or Regular Plan?
It may sound quite obvious that direct plan is always the better choice but thats not what I think. If you want to be investing directly with the fund house, you may need to invest individually with each of those fund house and maintain lot of paper work or online accounts with each fund house. So you may end up managing too many unnecessary stuff which I prefer avoiding if I can.
So I follow a simple rule which is opt for direct plan only if:
- Investing above Rs 100,000 – With an investment of 100,000 the expense ratio of 0.5% only means 500 Rs per year and so anything below that should be all ok for me to avoid maintaining yet another account with yet another fund house.
- Investing for more than 5 years – Investing for longer time frame means, the variation in NAV widens and adds considerably over time and so I tend to avoid regular plans when my time horizon is above 5 years.
Investing in a mutual fund through a brokers like ICICIDirect / ShareKhan or any other brokerage house, you will not be able to opt for direct plans which is quite obvious but at times you may invest in a HDFC Mutual fund by visiting HDFC Bank but that may not be treated as direct investment with the fund house because HDFC Bank and HDFC Asset Management Company are not the one and the same entity.