The Securities and Exchange Board of India (SEBI) will make direct mutual fund plans the default option on digital platforms from November 1. The change has brought the difference in costs between direct and regular mutual fund plans into focus, particularly how much investors could save by choosing direct plans over time.
For someone investing Rs 5,000 every month through a systematic investment plan (SIP), even a small difference in annual returns can add up to lakhs over 20 years.
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Direct vs Regular Mutual Funds: What Is The Difference?
Both direct and regular plans invest in the same mutual fund scheme and are managed by the same fund manager. Their primary difference lies in the costs involved.
Direct plans are purchased without a distributor, so they generally have lower expense ratios. Regular plans involve intermediaries, whose commissions are included in the scheme's expenses. These costs affect the returns investors ultimately receive.
How Much Can You Save On A Rs 5,000 SIP?
Consider an investor putting Rs 5,000 into a mutual fund every month for 20 years. The total investment would amount to Rs 12 lakh.
For example, the direct plan earns an annualised return of 12% after expenses, while the regular plan earns 11% after expenses. Under these assumptions, the direct plan could grow to approximately Rs 49.5 lakh, compared with around Rs 43.5 lakh for the regular plan.
The difference works out to approximately Rs 6 lakh in favour of the direct plan over 20 years.
These figures are illustrative, not guaranteed returns. Actual outcomes depend on market performance, the expense ratios of the respective plans and the investment period. The assumed one-percentage-point difference in annual returns is an example, not a universal difference between direct and regular plans.
Should Investors Switch To Direct Plans?
The new default does not discontinue regular plans or automatically convert existing investments. Investors can still choose regular plans if they prefer professional assistance with fund selection and portfolio management.
Before switching, investors should consider applicable exit loads and capital gains tax implications.
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For long-term investors, comparing expense ratios is an important part of choosing a mutual fund. Lower costs can help preserve more money for compounding, although investment decisions should also account for financial goals, risk tolerance and the value of professional advice.
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