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DIRECT plan vs REGULAR plan

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What are DIRECT plans and REGULAR plans?

A DIRECT plan is an investment in a Mutual fund scheme that you make in which you do your own study and analysis, understand the risks and invest yourself without the need of a distributor / agent / broker.

A REGULAR plan is an investment plan in which you seek the help, support, assistance and guidance from a distributor / agent / broker who will assist you in the investment process.

The underlying securities offered by the scheme will be the same for both the type of plans.

Further, you will not be paying any commission directly by yourself when following the REGULAR plan. However, the mutual fund scheme pays them from the corpus of the investment which means that indirectly your money is used to pay them commission.

Further, for the same scheme, a DIRECT plan would give in 0.5 to 1.5% higher returns over a REGULAR plan because the plan does not incur any commission charges to be paid.

So, if you know how to invest, where to invest and the processess involved (which by the way are very simple these days), go for DIRECT plans.

Why select DIRECT plan over REGULAR plan?

Question: Why not use brokers and go directly? Any disadvantages with brokers? I dont think they charge extra for mf? Kindly clarify.

Brokers can offer only REGULAR plans. Hence, the investments returns in such schemes will generally be 0.5 to 1.5% less compared to DIRECT plans (depending on scheme type).

So, when you are investing yourself, a DIRECT plan investor is likely to be get this advantage of 0.5% to 1.5% more than what REGULAR plan investors get just because you are bypassing the broker route even when everyone are investing in the same scheme.

Please note that the percentage of 0.5 to 1.5% is per year.

The returns will make a substantial difference over time.

The longer your SIP runs or you hold the investment, the more the difference will be.

Also for those fans of distributors and brokers out there:

Why take advise from websites and doing your own research and yet end up invest through them? If you are so much interested in giving money for free for distributor, give it a chartiy ;)

Transacting in DIRECT plan in a folio that had a REGULAR plan investment

Question: Sir I have reliance tax saver and axis long term adv through fundsindia. Can I purchase additional to these folio direct? I. E. DIRECT plan from axis and reliance mf site online?

I do not make any specific comments on FundsIndia.

Firstly, understand that investment websites such as FundsIndia and even stock borkers such as ICICI Direct do not offer DIRECT option for MF investment.

Secondly, they might not offer the post-sale support that they might have promised unless you know the people personally or stay in touch all through the period of your investment done through them.

Personally, it is always better to read, learn and get educated and then invest rather than depending on a some person or a tool to make decisions.

There are so many resouces online and some mutual fund houses conduct investor education programs to improve awareness. Do go to them even if you feel you know the topic.

If you are already investing in mutual funds through a broker, you can still transact in the same folio from outside the broker.

For instance, you can make all transactions by yourself directly by placing your request on the mutual fund house website or with the registrar or even by giving a paper transaction request.

All you need to have in you hand is some basic information:

1. Folio number of scheme / fund you invested in

2. Email and mobile number that was mentioned in the folio

You can get these details by looking at your Statement of Account.

Once you have these in hand, you can create a login at the mutual fund website or with registrars such as MyCAMS.

After login in them, you will be able to access your existing investment that was already done through the broker.

You can also make new investments in DIRECT plans, or switch the investments made in REGULAR plan to DIRECT plan or other transactions such as redemption.

What factors are common between REGULAR and DIRECT plan?

There will be several things that will be common between a REGULAR and a DIRECT plan.

These include:

  • Portfolio of the scheme
  • Investment Objective
  • Asset Allocation Pattern
  • Investment Strategy
  • Exit Load
  • Risk factors
  • Facilities offered
  • Other terms and conditions

How to convert an investment from REGULAR plan to a DIRECT plan investment?

Okay.. Now that we have learnt that DIRECT plans are better than REGULAR plans,

Let us come to the process of converting a REGULAR plan investment into a DIRECT plan investment.

Do not worry about your distributor

As we already know, REGULAR plan folios will have your broker id tagged.

This means that your distributor will come to know that you have discontinued the investment when he checks his statement.

However, believe me, most distributors are too busy to make such observations.

Also, do not worry about your distributor.

You need not have to think about it when you are no longer taking his services or advice.

Getting started with the switch

The first thing you have to do is to login to your mutual fund transaction interface (MyCAMS, Karvy MFS, AMC website etc.)

If there are any ongoing systematic transactions (such as SIP, STP, DTP etc.), you need to stop them.

Stopping the ongoing systematic transactions will mean that all future transactions will be stopped.

This means that all future transactions will not happen in REGULAR plan.

Note: You need to later re-start the systematic transactions again in DIRECT plan.

Now, the second thing you have to do is to generate a full "since inception" Statement of Account (SOA)(from the beginning of your investment) of your folio.

Check the type of schemes and plans you are invested (Equity / debt)

Then, check for the exit load for each of them.

Converting Debt schemes

Debt schemes carry a capital tax on both long and short term durations

So, there will be some tax payable either way.

So, one can blindly and straight away make the switch from REGULAR plan to GROWTH plan.

The exit load is an inevitable and small amount in most cases.

Converting Equity schemes

Unlike Debt scheme switches, Equity scheme switches take a bit of calculations and thinking.

This is because equity schemes have a different capital gains taxation structure.

Capital gains on equity schemes for short term (investments made less than a year) are taxable.

Capital gains on equity schemes for long term (investments made less than a year) are tax-free.

Further, there will be 1% exit load for investments held for up to 1-year.

There will be no exit load for investments that are over 1-year old.

So, clearly, holding an investment for over 1-year is a good thing.

Remember earlier that we have generated a Statement of Account.

Check the statement for the exit load of your REGULAR plan scheme.

For the purpose of this reading, we assume the exit load is 1% for investments held less than a year.

Carefully, check how many units are accumulated during the last one year.

Those units shall not be swiched because they have not yet completed one-year.

Those units shall be switched only after they complete one-year.

If you have invested in a systematic mode, each of the transaction needs to be checked as to when they will complete one-year of holding.

Find out how many units are accumulated prior to one-year.

You can switch these units from the REGULAR plan to DIRECT plan.

Doing the actual switch

Now, how to do actually do the switch?

Login to your mutual fund transaction interface (MyCAMS, Karvy MFS, AMC website etc.)

Go to "Transactions" option and then select the "Switch" option

Then select the folio number and your existing source scheme (the REGULAR plan scheme).

Then select the target scheme as the same scheme as the old one but this time, select the plan as DIRECT plan.

Select the scheme option as per you needs. Either GROWTH or DIVIDEND.

And the submit the form.

When investing through a broker do i have to pay them?

Brokers or Agents generally do not ask you to pay for the services they offer.

But, they get paid from the mutual fund house for having referred you to the investment.

The amount of commission that they get paid in a way (indirectly) comes from the investment that you make.

The quantum of commission will differ from scheme to scheme and from one fund house to another.

Most Mutual fund registrars, such as CAMS for instance, are now mentioning the amount that your broker is getting paid in the customer Statement of Account (SOA).

Why is NAV of DIRECT plans higher than that of REGULAR plans?

The Net Asset Value of NAV is just the rate at which you enter or exit from an investment. Being at a high value or a low value is not the right indicator to determine if the scheme is performing well or not.

This difference in DIRECT and REGULAR NAV, roughtly speaking, is what the brokers are being paid per unit.

Why is there substantial difference in NAV between DIRECT and REGULAR plans?

It so appears that the difference in NAV between DIRECT and REGULAR plans increases over a period of time.

This is because, as time progresses, DIRECT plan schemes tend to give slightly better returns because of the positive impact of lower expenses (compared to the REGULAR plan).

This will increase the NAV.

Further, because of its increased expenses in the REGULAR plan, the gap in NAV (and returns), over a period of time, increases.

Important: High NAV does not always mean bad for the investor.

Zerodha Coin

Zerodha is one of the best and leading stock broker in India. The company has introduced two platforms from where its clients can invest in Mutal Funds.

Firstly, MF.Zerodha.com is a platform from where investors can invest in REGULAR plans. Of course, this might not be a beneficial thing since we already know REGULAR plans carry high expenses and are not investor pocket friendly.

Secondly, Zerodha has started offering DIRECT plans via Coin.Zerodha.com. I will even avoid Coin.

Coin is a form of paid service. While the investment for the first Rs. 25,000 is free, there will be a monthly charge of Rs. 50 after that. This works out to be hugely expensive on the long run.

Coin requires investor make their mutual fund investments to their Demat. This is actually not a good idea. Every time there is a redemption, there will be a Demat charges for mutual funds which will be around Rs. 5.5 per redemption transaction.

Some investors say since the units are in demat form, pledging or taking loan is easy. I wonder how many retail investors actually pledge or take loan against their units of mutual funds. Even if they wanted, they can always do that even without demat.

Coin allows start - stop of SIP whenever you want without any NACH requirement. Actually, SIP is not something which we start or stop often. Even if you wanted to start-stop SIPs, almost all MF houses allow it doing it online these days. Further, the MF registrars and most Mutual fund houses now offer a One Time Mandate (OTM) that considerable reduces the time lag and related problems with starting and stopping SIPs.

Coin says being in demat, it will be much easier to claim by dependents (nominee of demat) in the case of death. This is true and this is one of the advantages of having a demat but then again this is not a feature of Coin but that of holding units under demat. Of course, nomination facility is always there with or without demat.

Additional Reading

How much would I save if I take the direct route over regular plans for SIP mutual fund investments?

https://www.quora.com/How-much-would-I-save-if-I-take-the-direct-route-over-regular-plans-for-SIP-mutual-fund-investments

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