Direct versus regular plans: what one percent actually costs over 20 years

Every mutual fund scheme exists in two versions. The direct plan is bought from the fund house; the regular plan is bought through a distributor who is paid out of the fund’s expenses. Same portfolio, same manager, different NAV.

The gap

The difference in expense ratio is typically 0.6 to 1.2 percentage points a year for equity funds. On a ₹10,000 monthly SIP over 20 years at an underlying 12%, a 1% higher cost reduces the final corpus from about ₹99 lakh to about ₹87 lakh. The distributor received roughly ₹12 lakh of your money.

Why the effect is so large

The cost is charged on the whole balance every year, including on the returns previous years generated. It compounds against you exactly the way returns compound for you. That is why a number that looks like rounding error at the start of a plan becomes a fifth of it at the end.

When a regular plan is defensible

If a distributor genuinely stops you from selling in a crash, that service can be worth more than the fee — investor behaviour destroys more returns than costs do. The question is whether you are getting advice or paperwork. If your distributor has never talked you out of a bad decision, you are paying for paperwork.

Switching, and the tax on it

Moving from regular to direct is a redemption and a fresh purchase, so capital gains tax applies and any exit load may bite. For a large existing holding, switch future instalments first and move the corpus in tranches across financial years.

How to check what you hold

Your consolidated account statement names the plan. If the scheme name does not contain “Direct”, it is regular. This takes two minutes and is the highest-return two minutes in retail investing.