NAV of Regular Plans are lower than Direct Plans in mutual funds. Shouldn’t I buy low and sell high? In that case, shouldn’t I be buying regular plans over direct plans in mutual funds?

The NAV of regular plans is lower because it includes distributor commission and it’ll always be lower than the NAV of its direct plan counterpart. In this case, your purchase price doesn’t matter. What matters, is the rate of growth after you purchase.

For example:

• If NAV of regular plan is 20 now and direct plan is 24, imagine it from an investor Point of View.
• When they releases NFO, NAV would have been 10. So if you have invested 10L and bought 1L units,
• Your returns would be 20L in regular plan and 24L in direct plan.
• You would have lost this 4 lakh as commission to your distributor. This is exactly what will happen whenever you invest in regular plan.

Let’s see few other most important questions on MFs.

I know regular plans are bad but if I switch, I’d have to pay taxes. I don’t want to pay taxes unnecessarily. Shall I continue with regular plans in this case?

Taxes are on realized gains. Commission is on entire corpus.

Just like the largest ant is no match for the smallest elephant, your taxes might be low enough, if any, compared to your potential commission losses over next few years. Even if it’s not, tax is a one-time headache.

Commissions are forever, till the date you’ve zero units to your name in the regular plan of a fund, you will be paying commissions everyday.

You could also switch out partially, and not all at once. That’d save you some taxes by spreading your redemptions over more than one financial year.

In a scenario like this, it’s best to compute the potential values for tax liabilities, project losses in commissions, and make a choice on a case-by-case basis.

Exact same thing is applicable for expense ratio as well.

If not for my distributor, I wouldn’t have started investing in mutual funds. I’m grateful to him. I can’t just switch to direct plans now.

It’s your decision to make but we’d advise you to think rationally about this, and keep your emotions aside when making decisions about your money. Your distributor may have introduced you to mutual funds but if he signed you up on regular plans, he probably didn’t sign you up because he was thinking of your welfare first.

At this point, you have the power to make decisions about your own money and switch to direct plans to save expense costs. You don’t even have to find different funds. If you’re not comfortable choosing funds, you can start investing in the direct plans of the same funds offered by your distributor. Even in that case, you’d save on a lot of expenses.

Would you rather be grateful to your distributor for the rest of your investing journey and lose up to 20% of your corpus in the long term, or switch to direct plans and not lose that money?

But my distributor also gives advice. I don’t know anything about mutual funds. Investing in direct plans is only for advanced investors.

If you really believe in your distributors advice and you don’t know anything about investing, then may be just may be, yes, you can consider to follow their advice. But regular plans of large cap funds haven’t been able to achieve for the average SIP investor, what the direct plan of a low-cost Nifty index fund has generated in the past. Clearly, the so-called financial advice from regular plan distributors hasn’t been good enough to even make-up for the cost in most cases.

Investing in direct plans is a risk-free way of improving returns. A good advisor would recommend direct plans to their clients. Also, when you invest in a mutual fund, the fund manager manages your portfolio. They are responsible for managing the investments in the fund you’ve invested in and adapt it according to market conditions. Your distributor has no role to play there.

SEBI has already issued notices saying that mutual fund distributors cannot be advisors. A person can either sell or advise but not do both.

Unlike a few years ago, we have many platforms today that offer investment in direct plans to every investor in the country. It has become much easier to invest in direct plans and manage your portfolio these days. One doesn’t need to visit an office, or use clunky websites with bugs and errors.

If you’re wondering which website / app you should use to invest in direct plans, check out our videos on it – you got 3 different options in this case.

We’d like to mention that choosing a “good” or a “best” fund isn’t important or required. Pick a decent actively managed fund and stick with it unless something fundamental changes about the fund. Or, if you’re still confused, pick an index fund and call it a day. The choice of the fund isn’t as important as sticking to that fund and investing in it in the face of market turbulence.

What is the takeaway?

The real takeaway from the last 3 episodes is simple – recurring costs can affect your investment corpus in a really bad way over the long term. As an investor, avoiding regular plans is important. But in the same spirit, we should also avoid other recurring costs as well, which add up over the years, such as (but not limited to):

• brokerage commission, in percentage terms (and not fixed), for equity delivery
• rebalancing costs
• frequent selling leading to capital gains taxes
• high asset management fees of exotic products
• improper tax harvesting

Unlike the commission from regular plans, some of the above aren’t always avoidable. But do keep the adverse effects of costs from repeatedly doing these in mind, when engaging in, say, rebalancing.

If you haven’t done it yet, take a look at your NSDL / CDSL CAS, and see if the word “direct” appears in the name of the funds that you’re invested in. If not, you’re most likely invested in the regular plan variant instead. Ideally, all your funds should be in direct plan mode, and no fund should be in regular plan mode. You might be losing money to a rent-seekers without receiving anything of value in return. If that’s the case, start the process of switching to direct plan today.

For more details and explanations, watch the video: