Fund distributors use various marketing tactics to attract investors. They often present half-truths as facts and create misleading opinions in the minds of the investors, which can be detrimental to the investor's interest. One such myth is when you initiate an investment into a mutual fund through a broker network - whether online or offline, it is marketed as a zero cost investment. This is true, however, only partially. The amount is invested in the fund of your choice, but under the regular plan, whereas if you invest directly via the Mutual Fund Company, you will have the option to invest in the same fund, under the direct plan.
All fund come in two variants - regular and direct. A regular plan is one in which the Mutual Fund Company pays your broker back a hidden % commission every quarter. But when you buy a direct plan instead, no commission are paid to anyone. The commission which is not paid to your broker are instead added to the fund's NAV (net asset value), in effect providing you a high return - which keeps on compounding. This is a real value add for the direct plans. For example, if a regular plan has an annual expense ratio of 1.50%, the normal plan will have an annual expense ratio, which will be lower at around 1%.
Expense ratio
Expense ratio is the fee charged by the investment company to manage the funds of investors. All the investment companies incur cost for operating mutual funds and they charge a percentage of asset funds to cover the expenses. Major components of the cost are like legal cost, administration cost, advertising cost and the management cost. This fee is different that the expenses incurred on the buying and selling of portfolio, which is transaction cost.
The bottom line
Direct Plans in Mutual Funds are best for those who want to increase returns by investing directly through the Mutual Fund Company and want to do documentation (i.e. mutual fund application, tracking, portfolio consolidation, KYC compliances, etc.) on their own. While the process may look little complicated in the initial stages, it should be easy while investing in subsequent schemes.