Direct plan in mutual funds are the investments wherein there is no intermediary involved in between investor and AMC. So, there is no charge that goes to the intermediary.
Regular plan involves intermediary. There are charges of the intermediary, and so the returns to the investor is lower as compared to direct plan.
To understand this with example, expense ratio of Quant Business Cycle Fund – Direct Plan is 0.57, whereas the expense ratio of it’s regular plan is 2.06. The difference is 2.06 – 0.57 = 1.49. This difference of 1.49 goes to the intermediary in case investor opts for regular instead of direct plan.
On a high level this means that 1.49% of the market value of the investment goes to the intermediary every year, but the calculation is not done yearly. Instead, it is done daily after the market closes. This is the reason for NAV of regular plan mutual fund scheme being lower than NAV of direct plan of the same mutual fund scheme.
As the fund becomes older, difference between NAV of regular and direct mutual fund increases. So, a large part of investment goes to the intermediary. This is large amount in long term. Intermediary can be an individual mutual fund distributor or bank, or some other institution offering regular plan.
It is clear from the above explanation that investor needs to opt for direct plan to have higher returns. Though it is true for most of the cases, but it may not apply in case investor does not have any knowledge of the market, and the intermediary helps investor with the decisions on investment. It is always recommended to learn the basics of market and mutual funds, and then invest with direct plan. Regular plan is not a good idea as it costs high to investors in long term.
Adding to this, learning about mutual funds is much simpler than learning about stocks. Investors can learn about them with youtube videos, reading blogs, and watching interviews of mutual fund managers.