Direct and regular plans
Also written Direct plan · Regular plan · Direct Plan and Regular Plan · Direct schemes
The two routes into the same mutual fund scheme: a direct plan with no distributor and a lower expense ratio, and a regular plan that pays distributor commission — same portfolio, separate NAVs.
In plain language
Every scheme offers investors two plans. They buy exactly the same thing.
The direct plan is for investors who invest directly in the mutual fund without routing the investment through a distributor. The regular plan is for investors who come through a distributor, whom they identify on the application form by the distributor's AMFI Registration Number (ARN). The mutual fund then pays commission to that distributor.
The workbook is unusually blunt about the difference: "The only difference between the two plans is the fee structure." The direct plan holds exactly the same assets as the regular plan; it simply carries no expense for distributor commission, and so it has a lower expense ratio and its own, higher NAV.
How it works
The mechanism runs through the base expense ratio (BER).
- In a direct plan, the BER includes only the core investment management and advisory fees and recurring expenses.
- In a regular plan, the BER includes those plus the distributor commission.
Both plans sit under the same SEBI ceilings. For an open ended equity oriented scheme, for instance, the BER limit is 2.10 percent on the first Rs 500 crore of daily net assets, falling slab by slab as the scheme grows. The commission is charged to the scheme as "commissions" and must be accounted for in computing the TER differential between regular and direct plans.
How the distributor is paid matters too. Mutual funds must follow the full trail model — no upfront commission and no upfronting of trail — with one exception: trail may be upfronted on SIP inflows, up to 1 percent payable yearly in advance for a maximum of three years, applicable to SIPs of up to Rs 3,000 per month, per scheme, for an investor investing in mutual funds for the first time. The upfront trail is paid from the AMC's books, amortised to the scheme daily, and recovered pro rata from the distributor if the SIP is not continued. The RTA computes all of this.
Direct plans can also be reached through execution only platforms (EOPs), which facilitate subscription, redemption and switch transactions in direct plans, and through stock exchange infrastructure. An investment adviser, who charges the client a fee for advice, cannot undertake distribution.
A worked example
Illustrative numbers. The expense ratios are assumed for the example, not quoted from any scheme, and expenses are treated as a simple deduction from return.
Two neighbours, Mr Iyer and Mr Qureshi, each put Rs 5,00,000 into the same flexi cap scheme on the same day. Mr Iyer goes direct; Mr Qureshi signs a form carrying his distributor's ARN, so he is in the regular plan.
The portfolio — identical for both — earns 12 percent before expenses in the year.
| Direct plan | Regular plan | |
|---|---|---|
| Assumed expense ratio | 0.70% | 1.50% |
| Net return | 11.30% | 10.50% |
| Value after one year | Rs 5,56,500 | Rs 5,52,500 |
The Rs 4,000 gap is the distribution cost Mr Qureshi paid for being serviced. Nothing about the securities differed, which is why the two plans show different NAVs from the first day even though they report the same portfolio.
Whether that is good value is the investor's call. What the exam wants is that the gap exists, that it comes only from the fee structure, and that it compounds every year the money stays invested.
Why NISM asks about it
Chapter 10 (Mutual Fund Products) defines both plans in section 10.2 and states that the only difference is the fee structure. Chapter 8 (Basics of Mutual Funds) explains how BER is applied to each plan and gives the BER slab table. Chapter 9 introduces execution only platforms for direct plans, and Chapter 14 (Financial Transactions) sets out the RTA's role in commission — the full trail model, SIP upfronting and the TER differential. A Chapter 14 sample question also tests that entry load has been abolished by SEBI, with "higher for direct plans" as a distractor.
Common exam traps
- The portfolios are identical. Direct and regular plans of a scheme hold exactly the same assets.
- The NAVs are not identical. The direct plan has a separate, higher NAV because its expenses are lower.
- The difference is the expense ratio, not a load. Entry load has been abolished; a direct plan does not carry a higher one.
- Regular plan = distributor identified by ARN. An investment adviser is not a distributor and cannot take commission.
- Full trail is the rule; SIP upfronting is the only exception — up to 1 percent a year in advance, for at most three years, on SIPs up to Rs 3,000 a month per scheme from first-time mutual fund investors.
- Both plans live under the same BER limits. The regular plan does not get a separate, higher ceiling for commission.
Where this is taught
Free preparation for NISM Series II-BRelated terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Base Expense RatioThe management-and-administration slice of a scheme's cost, capped by the SEBI slabs — the first and largest of the four components that add up to Total Expense Ratio.
- Execution only platformA SEBI-recognised digital platform that carries out subscription, redemption and switch transactions in direct plans of mutual fund schemes only — registered with AMFI (Category 1) or as a stock broker (Category 2).
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- T-30 and B-30SEBI's split of mutual fund inflows into the top 30 cities by AUM (T-30) and everywhere beyond them (B-30), used to pay higher distribution incentives for B-30 inflows — tagged by the RTA from the investor's PIN code.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Investment adviserAny person who, for consideration, is in the business of giving investment advice, including anyone holding out as one — but not an AMFI-registered distributor whose advice is incidental to distribution.
- Distribution AgreementThe contract between an AIF's investment manager and a distributor, defining the distributor's role, binding it to a code of conduct and fixing how commission may be paid.
- Trail commissionThe commission an AMC pays a mutual fund distributor as a percentage of the current value of the investments they brought in, calculated daily and paid for as long as the investor stays invested.
- Know Your DistributorAMFI's verification process for mutual fund distributors — document verification plus a biometric impression of the right index finger, traditionally at a CAMS Point of Service — completed before ARN registration.
- One-Time MandateA folio-level authorisation letting a specified mutual fund debit a specified bank account through NACH for purchases, up to a set limit, so the investor need not initiate payment each time.
- Full trail modelSEBI's rule that AMCs pay distributors only trail commission in all schemes — no upfront commission and no upfronting of trail, in cash or kind, through sponsorships or any other route.
- Cooling off periodThe 12 months after an investor-initiated change of distributor code in a folio, during which no trail is paid to either distributor; only afterwards may the AMC consider paying the new one.
- Fee-only adviserAn investment adviser who earns income from fees paid by the client — not commissions from product providers — and typically does not execute the transactions advised.
- Direct access facilityA facility requiring portfolio managers to let investors come to them directly, without a distributor, so that the investor avoids distribution costs — the PMS counterpart of a mutual fund direct plan.
- Direct investmentBuying a security or commodity directly from its issuer or a dealer, without going through a pooled investment vehicle such as a mutual fund, AIF or portfolio manager.
- Execution only servicesA distribution model where the firm does not charge for advice and earns instead from commission on what it sells or executes, distinct from the fee-only advisory route an Investment Adviser must follow.
- Family of an individual investment adviserUnder SEBI's Investment Adviser Regulations, the individual adviser themselves, together with their spouse, children and parents — the group a compliance rule reaches when it says "family."