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WHAT IS A DIRECT PLAN?

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One may invest in mutual funds with the help of a financial intermediary i.e., a Mutual Fund distributor/agent in a Regular Plan OR choose to INVEST DIRECTLY i.e., without involving or routing the investment through any distributor/agent in a ‘Direct Plan’.

‘Direct Plan’ and ‘Regular Plan’ are both part of the same mutual fund scheme, have the same / common portfolio and are managed by the same fund manager, but have different expense ratios (recurring expenses that is incurred by the mutual fund scheme).

Direct Plan has lower expense ratio than the Regular Plan, as there is no distributor/agent involved, and hence there is saving in terms of distribution cost/commissions paid out to the distributor/agent, which is added back to the returns of the scheme. Hence, a Direct Plan has a separate NAV, which is higher than the normal “Regular” Plan’s NAV. Over the years, the lower expense ratio of Direct Plan translates to higher returns on the investments which keeps compounding over the years. Thus, the investment in Direct Plan would be worth more over a period, in comparison to investment in Regular Plan of the same scheme.

It should be however borne in mind that the difference between NAV of Direct Plan and Regular Plan tends to be marginal. Thus, although there may be additional gain in Direct Plan, it may not be significant to make a big difference.

Direct Plans are for those who prefer to invest DIRECTLY in a mutual fund scheme without the help of any distributor/agent. Investing in a Direct Plan is like buying a product from the manufacturer directly, whereby the cost to customer would be lower. Except that, investing in a mutual fund scheme directly is not as simple as buying a shirt or a pair of trousers or a TV from a factory outlet, because choosing a mutual fund scheme requires adequate knowledge and awareness of the mutual fund product, especially the market risks that are associated with the potential rewards. Choosing a Direct Plan means making your own decisions about fund/scheme selection (and the related execution work) which not everyone may be equipped to do.

Thus, Direct Plan is suited for those who understand what kind of mutual funds are needed for different kinds of investment needs, are capable of researching these independently and able to identify/shortlist the funds to invest in, and then go through the process of actually investing without the help of an intermediary. But when the markets fall and investment values come under pressure, an external source of advice can help one stay the course. Thus, Direct Plan make sense only if you have adequate knowledge and capability to select good funds yourself; or, are willing to seek professional advice of a SEBI registered investment adviser for a fee (and execute the investment transaction / paperwork by yourself).

While the Direct Plan makes sense for the knowledgeable, Do-it-Yourself (DIY) investors, it may not be suited for all investors, especially new and inexperienced investors. So, if you are new and inexperienced investor or unsure in which scheme to invest and need guidance/assistance in investing, you may be better off seeking help of a mutual fund distributor and invest in Regular Plan.

HOW TO INVEST IN A DIRECT PLAN?

You could invest in a Direct Plan online on the website of the mutual fund or the Mutual Funds Utility (MFU) portal, OR through a physical application form, which can be submitted at the investor service centre/branch of the concerned mutual fund or its its registrar and transfer agent (RTA).

While filling up a mutual fund application form – whether online via the website of a mutual fund or in physical mode, please ensure that you tick / select the ‘Direct Plan’ box. If you are choosing the physical mode, it is advisable to strike out the box for distributor code on the top of the application form or write the word “Direct” in the box.

There are also a few online portals which offer a facility to invest in direct plans. However, such online portals are run by private firms that offer robo-advisory financial planning services, usually for a fee – which could be per year or per transaction.

Please also note that, not all online portals offer Direct Plans, even though one may invest in mutual fund schemes on such portals. Many banks offer an option to invest in MF schemes on their Internet banking portal. Financial intermediaries, including banks are mutual fund distributors, and hence do not /cannot offer you Direct Plans on their web portals.

Source: AMFI (Association of Mutual Funds in India)
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