What is a Direct Plan in Mutual Funds?
A Direct Plan is an investment option in mutual funds that allows investors to buy units directly from the Asset Management Company (AMC) without involving intermediaries like distributors or agents, It’s DIY (Do It Yourself). Introduced by SEBI in January 2013, Direct Plans aim to reduce investors’ costs by eliminating distribution expenses and commissions, typically included in Regular Plans.
While both Direct and Regular Plans belong to the same mutual fund scheme, share the same portfolio, and are managed by the same fund manager, they differ in expense ratios. Direct Plans have lower expense ratios because there is no intermediary commission, leading to a slightly higher Net Asset Value (NAV) than Regular Plans. Over time, these cost savings can compound into higher returns for investors.
Direct Plans are ideal for knowledgeable, Do-it-Yourself (DIY) investors who can independently research and select mutual fund schemes suited to their financial goals. However, these plans may not be suitable for new or inexperienced investors, who might benefit from the guidance of a distributor or financial advisor, especially during market downturns.
How to Invest in a Direct Plan?
Investing in Direct Plans can be done online through:
- Mutual fund websites.
- Platforms like Mutual Fund Utility (MFU) or stock exchange platforms.
- Private portals offering Direct Plans (e.g., Paytm Money, Groww, Zerodha Coin).
Alternatively, investors can use physical application forms submitted to the AMC or its registrar (e.g., CAMS, KFintech). When applying, ensure you select the “Direct Plan” option and avoid entering any distributor code.
Key Considerations
Direct Plans are like buying directly from a manufacturer, saving costs compared to buying through intermediaries. While the investment mix, objective, and fund manager remain the same between Direct and Regular Plans, the NAV and expense ratio differ. For example:
- ICICI Prudential Value Discovery Fund – Direct Plan: Expense Ratio 1.06%.
- ICICI Prudential Value Discovery Fund – Regular Plan: Expense Ratio 1.55%.
So, the brokerage is 1.55 – 1.06 = 0.49, i.e. the brokerage received by the distributor.
In summary, Direct Plans offer cost savings and higher long-term returns but require adequate knowledge of mutual fund investing. New investors may still benefit from professional advice or distributors until they gain confidence in fund selection.
