Direct vs Regular — economics
In this chapter: Distributor commission structure · Where the difference goes for the client
SEBI introduced Direct Plans in 2013. Direct plans bypass distributors — the investor goes directly to the AMC. Lower expense ratio (typically 0.5-1% lower than Regular) means higher returns. Regular plans embed distributor trail commission in the TER. Both plans hold the same portfolio; only the cost differs.
Distributor commissions: trail commission of 0.3-1.5% per year on AUM brought in. Some categories (small-cap, sectoral) pay higher; index funds pay almost nothing. Direct plans: investor saves the trail commission, compounded over decades. For a long-term SIP, Direct is materially better. For a short-term goal (3-5 years), the gap is smaller. Counterargument: distributors provide service, hand-holding, and ongoing reviews — for unsophisticated investors, the trail might be worth it. But for self-directed investors, Direct is the obvious choice.
A nuanced insight for distributors: the long-term economics of Regular plans favour distributors only if the AUM persists. High churn destroys distributor revenue more than client wealth. Distributors should optimise for client retention via genuine ongoing service — not for one-off sales commissions. RIAs (fee-only) get paid only by the client, removing this conflict. The Indian industry is gradually shifting from distribution to advisory; competent practitioners are positioning ahead of the curve.