Investment guide for Mutual Fund Direct Plan vs. Regular Plan

Direct Plan and Regular Plan of Mutual Fund are most likely not a new term for people if you are not living under rocks from last few years.

Certainly, there are many articles pop-up when you do simple Google search. In simplistic words, when you buy funds under Regular Plan you have a distributor in-between you and AMC (Asset Management Company), who get a small portion (roughly about 0.30% to 0.80% on average) of your every investment from AMC on your behalf as part of the expense ratio. Wherein, when you go with Direct Plan then you are directly dealing with AMC so no such charge being paid hence their expense ratio is low compared to Regular Plan. But as Uncle Ben said in Spiderman, With great power comes great responsibility. By saving a small percentage on Direct Plan we loose helping hand too, as most of Financial Advisor act as a distributor to provide discounted advice services.

There isn’t anything new I have said and probably you already knew it or figured it by clicking earlier Google search link.

Here is my take on providing guidance to choose between Direct Plan vs. Regular Plan with reference to your experience on financial understanding.

Trainee : You are a beginner having no knowledge and/or skill to choose a mutual fund and measure it’s up and down. Such people should choose a Financial Advisor (online or offline) who will prepare your portfolio and help you on setting it up and monitor on at least twice a year. Some of the online Financial Advisors (also known as Robo Advisor) are free or cheap but mostly they will force you for Regular Plan so that they get regular cut from your investment, wherein offline Financial Advisor (Traditional Human Advisor) will give you both (Direct and Regular) options and their charges vary according. It’s always better to take help instead of not investing. As you mature and start to understand how to invest then slowly but steadily move to Direct Plan.

Intermediate : You have some knowledge and skill to understand and construct portfolio if someone helps you to identify appreciate Mutual Fund. For such people, there are discounted advice services which mostly charge less than or around thousand rupees to suggest a Mutual Fund based on risk profile analysis and you can start preparing portfolio on Direct Plan yourself. Or you could start with Financial Advisor and move to Direct Plan shortly. NOTE: switching plan from Regular to Direct is treated as withdrawal and reinvestment, so there could be some exit load charge.

Senior/Advanced : You have knowledge and skill to understand Mutual Fund indicators from several available resources. So you can prepare your portfolio and construct yourself with Direct Plan. You monitor and make adjustments on a need basis.

Please do not overestimate your finance ability and consider yourself as senior if you are not. It’s better to have profit with small but additional expense ratio as opposed to facing losses or not making investment at all.

As you attain finance experience you should change your profile as discussed above. But delaying investment decisions are certainly not helpful for your future self.

Enjoy your investment journey!

Also published on Medium.