Direct Plans vs Regular Plans in Mutual Funds:
Regular Plans pay commissions to the broker or the distributor. This commission is added to the expense ratio of the scheme. So these plans have a higher expense ratio as compared to Direct Plans that do not have commission expenses. Regular Plan commissions can amount to as much as 1.5% of the AUM(the value of your holdings) as commission from Mutual Funds, every year! When brokers tell you their advice is for free, it isn’t. Because you pay a heavy price (commissions and advice biased by commissions) for it. In effect, regular plan investments give you lower returns as compared to Direct Plans because of these commission expenses. Obviously, a broker will never help you or advise you to invest in Direct Plans.
In short, if you invest in Direct Plans, the same schemes will get you better returns.
Recommended Read : How to save money in your 20’s or 30’s through Systematic Investment Plan?
Direct Plans will help me save 1.5% commissions every year, that’s not much!!!
If you consider the compounding impact of this leakage year on year, it adds up to quite a bit. We did the portfolio value calculations for just a Rs 1.00 lakh investment in a Direct Plan and a Regular Plan over 40 yrs. Your investments will be worth 35% more in just 20 yrs when you invest in Direct Plans. See the chart below:
We assumed a 12% Return on investments and a Total Expenses Ratio of 1.0% for Direct Plans and 2.5% for Regular Plans.
But my broker provides me advice. It’s OK if he earns some commission. Is that wrong?
Yes, it is. Because the commission is paid by the fund house and not by you directly. Whose interest will the broker work for? Isn’t there a conflict of interest when the broker has to make a choice between the scheme that suits your risk profile and objectives vs a scheme that pays attractive commissions?
Agreed, Direct Plans are better, but how do I choose which Funds to invest in?
You can visit “Kuvera :: Wealth Management Simplified” and try our Financial Planning Solution here. We do your risk profiling and goal planning to build a detailed financial plan. And recommend which Mutual Fund schemes in which you should invest. We have used our years of Investment Management experience to develop a scientific and disciplined approach to investing. Importantly, we are a Direct Plan only platform so our advice is never biased by commissions.