How do Direct Plans and Regular Plans of the same mutual fund scheme differ regarding Total Expense Ratio (TER), distributor commissions, and Net Asset Value (NAV)?

[ A ]Direct Plans have a higher TER because the AMC charges an additional portfolio management fee directly to the unitholder.

[ B ]Direct Plans have a lower TER because no distribution expenses or commissions are charged, resulting in a higher NAV compared to the Regular Plan over time.[ CORRECT ]

[ C ]Both plans have identical TER and NAV because distributor commissions are paid directly by the Reserve Bank of India.

[ D ]Direct Plans pay higher trail commissions to distributors than Regular Plans while maintaining the exact same daily NAV.

Takeaway

Option B is correct: Direct Plans have a lower TER because no distribution expenses or commissions are charged, resulting in a higher NAV compared to the Regular Plan over time.

Derivation

SEBI mandates that every mutual fund scheme must offer both a Direct Plan and a Regular Plan sharing the same underlying investment portfolio. The Direct Plan is for investors applying directly without a distributor. It does not carry distribution expenses or trail commissions, resulting in a lower Base Expense Ratio (BER). Because fewer expenses are deducted daily, the Direct Plan steadily accumulates a higher Net Asset Value (NAV) and delivers higher compounded returns than the Regular Plan. This tests plan mechanics. A common trap is assuming both plans share identical NAVs.

Why the others fail

A — Direct Plans have a higher TER because the AMC charges an additional portfolio management fee directly to the unitholder.

Direct Plans do not incur distribution commissions and therefore consistently feature a lower TER, not a higher TER.

C — Both plans have identical TER and NAV because distributor commissions are paid directly by the Reserve Bank of India.

Distributor commissions are paid out of the Regular Plan's TER, which causes the NAV of Direct and Regular plans to diverge.

D — Direct Plans pay higher trail commissions to distributors than Regular Plans while maintaining the exact same daily NAV.

Direct Plans pay zero commissions to distributors, as they are legally designed exclusively for direct unitholder purchases.