What are direct plans? Why should I prefer direct plans over regular?
A relatively less known fact is that every Mutual Fund scheme has two distinct avatars – REGULAR & DIRECT. The two avatars are identical in every sense – they are the same fund to begin with, they follow the same philosophy, are managed by the same fund manager & invest in the same stocks. The difference is only of commissions.
An investor who invests in a particular fund via an intermediary: a banking or trading platform or an advisor: is automatically assigned the Regular Avatar. On the other hand, an investor who invests directly with the fund house is assigned the Direct Avatar. While the two investors invest in the exact same fund, their returns are different.
The difference is because of expenses. Every fund pays a commission (0.6% - 1.5% in the case of Equity Funds) to an intermediary (your advisor) for getting them business, and this gets factored into the price of a fund purchased through the regular route.
The fund house doesn’t have to pay a commission to anyone for an investor who invests direct, and hence the direct avatar doesn’t need to factor in those costs. If one were to look at this difference over long periods – the difference becomes too large to ignore.
The only thing Regular about the “Regular Plan”, is that you keep paying this commission regularly, year after year. Piggy makes you invest in the direct plans of mutual funds. As a result, you could invest in the same fund as someone else, and still make more money; simply because you didn’t pay any commission.