Imagine you want to buy a bottle of water. You go to a supermarket and buy it for ₹20. Now, imagine you go to a fancy 5-star hotel. You order the same bottle of water (same brand, same plastic, same water). The waiter brings it to you on a silver tray. The bill? ₹100.
Why the difference? You aren't paying extra for the water; you are paying for the service, the ambiance, and the waiter's salary.
In Mutual Funds, Regular Plans are the 5-star hotel water. Direct Plans are the supermarket water. Both invest in the exact same stocks, managed by the exact same fund manager. But one charges you significantly more than the other.
1. The Two Structures Explained
Every mutual fund scheme in India comes in two variants. For example, "HDFC Top 100 Fund - Regular Plan" and "HDFC Top 100 Fund - Direct Plan."
Regular Plan
This is sold through a distributor, agent, bank relationship manager, or broker.
The Mechanism: The mutual fund company (AMC) pays a commission to the agent for bringing your money to them.
The Cost: This commission is not paid by the AMC's profits. It is deducted from your investment value every single day.
Direct Plan
This is bought directly from the AMC (or via platforms like Zerodha Coin, Groww, etc. that act as Registered Investment Advisors or Execution Platforms).
The Mechanism: No middleman is involved.
The Cost: Since there is no commission to pay, the AMC lowers the fees (Expense Ratio) for you.
Where Does Your Money Go?
2. The "Trail Commission" Trap
Many investors think, "I paid my agent a one-time fee when I invested." This is incorrect. Entry loads were banned in India years ago. Instead, agents earn a Trail Commission.
How Trail Works:
The agent gets a percentage (usually 0.5% to 1.25%) of your total portfolio value every year, for as long as you stay invested.
Example: You invest ₹10 Lakhs. The value grows to ₹50 Lakhs over 10 years.
In Year 1, the agent earns ~₹10,000.
In Year 10, the agent earns ~₹50,000 from you, just for having sold you the fund a decade ago. This eats into your compounding.
3. The Math of the 1% Difference
Is 1% really a big deal? Yes. Because of compounding, a small leak sinks a great ship. Let's look at the numbers.
SIP of ₹10,000/month for 20 Years
Assumed Market Return: 12% | Regular Expense: 2% | Direct Expense: 1%
You lost ₹16 Lakhs just by ticking the wrong checkbox. In a larger portfolio (e.g., ₹50k SIP for 30 years), this difference grows to over ₹2.5 Crores.
4. The Role of the Distributor
Does this mean Regular Plans are a scam? No. Distributors play a vital role for certain investors.
When should you choose Regular Plans?
- You have zero knowledge of finance.
- You need handholding to open accounts, do KYC, and manage paperwork.
- You need behavioral coaching to stop you from selling during a market crash.
A good advisor earns their 1% commission by preventing you from making behavioral mistakes that cost you 20%. However, if you are a DIY investor who can manage your own emotions and transactions, the 1% is a waste.
5. Direct vs Regular: A Quick Comparison
| Feature | Regular Plan | Direct Plan |
|---|---|---|
| Expense Ratio | High (e.g., 2.0%) | Low (e.g., 0.8%) |
| NAV | Lower (Returns deducted) | Higher (Returns retained) |
| Suffix in Name | "Regular" | "Direct" |
| Suitability | Newbies needing advice | Informed Investors |
| Returns | Lower | Higher |
6. How to Switch from Regular to Direct
If you realized you are in a Regular plan, don't panic-sell everything immediately. Switching is treated as a Redemption (Sale) and a New Purchase.
Steps to Switch safely:
- Check Exit Load: If you bought the units less than 1 year ago, there might be a 1% penalty for selling. Wait until the exit load period is over.
- Check Taxes: Selling equity funds under 1 year triggers 20% Short Term Capital Gains tax. Selling after 1 year triggers 12.5% Long Term Capital Gains tax (above ₹1.25L profit).
- The Strategy: Stop your existing SIP in the Regular Plan immediately. Start a new SIP in the Direct Plan of the same fund. Let the old Regular units age (to avoid exit load/tax) and switch them slowly over time.
Summary of Module 7
The debate between Direct and Regular is simple: Do you want to pay for advice? If yes, pay the Regular plan commission willingly. If no, go Direct. Do not be in a Regular plan simply because your bank RM told you to sign a form.
In the next module, we will discuss the one partner who takes a share of your profits regardless of which plan you choose: The Government. We dive into the Taxation of Mutual Funds.