Direct vs regular mutual fund plans — the one difference that matters

Every open-ended mutual fund scheme in India comes in two plans with the same name, the same portfolio and the same fund manager, and two different NAVs. The difference between them is a single line in the expense ratio. Knowing which plan you hold, and what that line buys, is the whole of this subject.

What the two plans are

SEBI requires every scheme to offer a direct plan alongside its regular plan. A regular plan is bought through a distributor — a bank, a broker, an app or an individual agent registered with AMFI — and the distributor is paid a commission out of the scheme’s expenses. A direct plan is bought from the fund house itself, or through a platform that does not take commission, and carries no such payment.

Everything else is shared. The two plans are the same scheme: one pool of investments, one manager, one set of holdings and one set of risks. A unit of either plan represents the same slice of the same portfolio.

Where the difference shows

The commission paid to the distributor is part of the regular plan’s expense ratio and absent from the direct plan’s. Expenses are deducted from the scheme’s assets every day before the NAV is struck, so the direct plan’s NAV is higher, and the gap between the two NAVs widens over time by exactly the commission, compounded (how a NAV is built).

Both expense ratios are stated in the scheme information document and in the fund house’s monthly disclosures, and the gap between them is the distributor’s payment. It is not a hidden charge: it is disclosed. It is also not a charge for the fund’s management — that part is the same in both plans.

Telling them apart

The plan is in the name. AMFI’s daily NAV file lists each scheme as, for example, “… Fund – Direct Plan – Growth” and “… Fund – Regular Plan – Growth”, or with “Direct” absent for the regular plan. Every scheme page on this site lists its plans and options side by side with their NAVs, so the gap is visible. An account statement or a platform’s holdings page names the plan the same way; a holding without the word “Direct” is a regular plan.

What the regular plan’s cost pays for

The commission is the price of the distributor’s service: helping choose schemes, doing the paperwork, keeping records, reminding and answering questions. Whether that service is worth its price is a question about the investor, not about the fund — some people want it, some do not need it, and SEBI-registered investment advisers offer the same help for a fee instead of a commission (SEBI investor education). This site shows both plans and the NAV gap; it does not say which to hold.

Switching between plans

A switch from one plan to the other is not a relabelling. It is a redemption from one plan and a purchase in the other, at that day’s applicable NAVs, and it has the consequences of both:

• an exit load, if the units are still inside the scheme’s load period;
• capital gains tax on the redemption, as for any sale of units, depending on how long they were held;
• a new holding period starting from the purchase date in the new plan;
• an SIP in the old plan must be stopped and a new one registered in the new plan.

The fund house’s or the registrar’s switch form does all of this in one instruction, but the tax and load consequences are the same as selling and buying.

What to check on your own holdings

Open a statement and read the plan name on each line. Then look up the scheme on this site or on the fund house’s website and compare the two expense ratios in the scheme document. The difference is what the regular plan costs per year, in percent of the holding; your statement’s value times that percentage is what the distributor’s service costs you in rupees. That is the number to weigh against what you receive for it.