Direct plans: When lower costs come at a price

Published 10 August 2026 · finance

The return gap Before you continue reading How financially free are you? Most people overestimate their financial freedom. Discover your Financial Freedom score through a

The return gap Before you continue reading How financially free are you? Most people overestimate their financial freedom. Discover your Financial Freedom score through a quick survey Calculate My Score The behaviour gap The guiding light Value over math Mutual fund investors got their own ticket to freedom in 2013. It was the year direct plans were introduced, letting investors buy straight from the fund house or investment platform, bypass ing the distributor and the commis sion. These plans are cheaper, and DIY (Do-It-Yourself) investors have taken to them since—direct plans now com prise 30% of assets under management among individual investors.But freedom comes with less handholding. According to AMFI (Association of Mutual Funds of India, the mutual fund industry’s trade body), 41% of assets in direct plans are re deemed within the first year, and only 20% remain invested for over three years, compared with 32% in regular plans. Direct investors save on costs, but they are also quicker to exit at the first sign of trouble.On average, the direct plan of a diver sified equity scheme charges a 1.12% annualised expense ratio, even as the regular variant charges 2.07%. This differential of up to 1% in expense ra tios can translate into sizeable gains over the years for the direct plan.Over the past 10 years, a monthly systematic investment plan (SIP) in the direct and regular plan of the average equity fund fetched 15.93% and 14.78%, respectively. In terms of annualised re turns, the gap may not seem much. But the rupee value of that gap is notewor thy.

An investor putting away Rs.10,000 monthly in the regular plan would have fetched Rs.25.58 lakh over 10 years. But the same investment in the direct plan would have generated Rs.27.42 lakh over this period. That is a shortfall of Rs.2.03 lakh in the regular plan, pocketed by the distributor. As investing time hori zon expands, this chasm widens.Clearly, the math favours taking the direct plan route. However, the math assumes that the investor remains steadfast throughout this investing journey, staying invested despite pre vailing circumstances. In reality, the average investor, is prone to deviations. He chases recent winners and fads. When the market crumbles, he panics and redeems. He discontinues his SIP if he doesn’t see a healthy return after two years. He stops and restarts the SIP in tandem with the market’s ebbs and flows.This is exactly why the “average investor re turn” across the industry consistently trails the “average fund return”, observes Mohit Bagdi, Head of Investment Research of MIRA Money. “The fund did fine; the investor’s tim ing and behaviour did not.”Years later, the savings from a lower ex pense ratio may prove illusory because the average DIY investor pays a silent behavioural ‘tax’. Ajay Kumar Yadav, Group CEO & CIO, Wise Finserv, says the visible cost difference between direct and regular plans is often out weighed by the hidden cost of poor asset alloca tion, wrong fund selection, panic exits, stopped SIPs and mistimed switches. As Ramesh Vishwanathan, CEO, FPSB India, puts it, the real cost of DIY investing shows up not in ex pense ratios, but in investor behaviour.The regular plan fetches you the same fund and the same fund manager for a higher cost.