Direct vs Regular plans: how a commission you never see costs you lakhs

Open almost any scheme on this site and you will find it twice — once as “Direct” and once as “Regular”. Same fund house, same fund manager, same portfolio of stocks, same buy and sell decisions on the same days. Two different NAVs, and the gap between them widens every year.

Nothing about the investing differs. The only difference is who gets paid.

What the two plans are

SEBI required every scheme to offer a Direct plan from 1 January 2013.

• A Regular plan is bought through a distributor — a bank, a broker, an app, an advisor. The fund house pays that distributor a trail commission for as long as you stay invested, and recovers it from the scheme’s assets.
• A Direct plan is bought from the AMC itself, or through a platform that takes no commission. There is no trail to pay, so it is not charged.

That commission is not a separate line on your statement. It is inside the scheme’s expense ratio, which is deducted from the fund’s assets before the NAV is struck. You never see it charged because you are never charged — the fund is, daily, out of your money.

This is why the two plans drift apart. They start on the same day at the same NAV and then the Regular plan’s NAV grows very slightly more slowly, every single day, forever.

What the gap is worth

For an actively managed equity fund the difference in expense ratio is usually somewhere between 0.5 and 1.0 percentage points a year. On index funds it is smaller in absolute terms but often larger as a proportion of the total cost.

A percentage point sounds like rounding. Compounded over an investing lifetime it is not. Take ten lakh rupees held for twenty years:

• at 12% a year it becomes about ₹96.5 lakh
• at 11.25% a year — the same fund, minus a 0.75 point commission — it becomes about ₹84.3 lakh

The distributor’s cut, over those twenty years, came to roughly ₹12 lakh on a ₹10 lakh investment. It is larger than the original investment, because it was taken from the compounding, not from the principal.

Run it with your own numbers:

When Regular is the right answer anyway

The gap is the price of advice, and advice is worth something. A distributor who stops you selling in March 2020, or who gets you invested at all instead of leaving the money in a savings account, has earned more than a percentage point.

The question is not “is Regular bad” — it is “am I getting advice?” If your Regular plan came from tapping a button in an app that has never asked you a question, you are paying a trail commission for a service nobody is providing. If you have an advisor who knows your situation and takes your calls, that is a different transaction.

Note also that a SEBI-registered investment adviser charges you a fee directly and puts you in Direct plans. That is a third arrangement, and it makes the cost of advice visible instead of embedding it in the NAV.

Switching is a sale, not a switch

If you decide to move existing Regular units into the Direct plan of the same fund, understand what actually happens: the Regular units are redeemed and Direct units are purchased. It is not an administrative re-labelling.

That means it is a taxable event — the gain on the redeemed units is realised and taxed under the normal rules — and an exit load may apply if the units are young. For a holding with a large unrealised gain, the tax due today can exceed several years of the commission you are trying to escape.

The usual conclusion is: direct all new money to Direct plans, and leave existing holdings alone unless the arithmetic genuinely favours moving them.

Finding the Direct plan

Every fund on this site carries its plan in the scheme name, and the screener treats Direct and Regular as separate rows, because they are separate schemes with separate NAV histories and separate returns. If you are comparing two funds, make sure you are comparing like with like — a Direct plan will out-return the Regular plan of an inferior fund often enough to mislead you completely.

Key takeaway

Direct and Regular are the same fund with a trail commission deducted from one of them daily, before the NAV is struck. Over twenty years that gap can exceed the original investment. Send all new money to Direct, and move existing Regular units only when the tax cost of switching is small — because a switch is a redemption, not a re-labelling.