Investor Corner/The asset classes/Mutual Fund Core Concepts
2.3.3 Scheme vs Plan
A scheme is the underlying investment strategy, such as large cap equity or short duration debt. A plan is the specific version of that scheme you actually buy, most commonly either Direct or Regular.
Two layers, often confused for one
An AMC might run a scheme called, for example, a flexi cap fund. Within that single scheme, an investor can typically choose between a Direct plan and a Regular plan. Both plans invest in exactly the same underlying portfolio of stocks or bonds; what differs between them is purely the distribution cost, not the investment strategy itself.
A mutual fund scheme is the actual investment product with a defined mandate: HDFC Flexi Cap Fund, SBI Blue Chip Fund, ICICI Prudential Liquid Fund. Each scheme has a specific investment objective, asset allocation and benchmark. The scheme is what you analyse for performance, portfolio quality and suitability.
Within each scheme, there are typically two plans: Direct and Regular. Both invest in exactly the same portfolio and are managed by the same fund manager. The only difference is the expense ratio. The Direct plan has a lower expense ratio because it does not pay distribution commission to intermediaries. The Regular plan has a higher expense ratio because it includes a trail commission paid to the distributor or advisor who facilitated the purchase.
Why the same scheme can show two different NAVs
Direct and Regular plans of the same scheme have separate NAVs precisely because Regular plans carry a distributor commission built into their annual expense ratio, which the Direct plan does not. Over time this creates a growing gap between the two NAVs, even though the underlying investments are identical.
There can also be two options within each plan: Growth and IDCW (Income Distribution cum Capital Withdrawal, formerly called Dividend). These determine what happens to the fund's realised gains. In the Growth option, all gains are reinvested in the fund and reflected in a rising NAV. In the IDCW option, the fund periodically distributes a portion of gains to investors as cash payouts. The underlying portfolio is identical in both options; the difference is purely in how gains are handled.
The combination creates four variants of the same scheme: Direct Growth, Direct IDCW, Regular Growth, Regular IDCW. All four invest in the same stocks or bonds. The NAVs differ because of the expense ratio difference (Direct vs Regular) and because IDCW options periodically reduce their NAV by the amount distributed. For most accumulation-phase investors, Direct Growth is the most cost-effective and tax-efficient combination.
The practical decision
When choosing to invest in a scheme, the plan decision, Direct or Regular, is really a separate question about whether you want to pay for distribution and advice, covered fully in its own dedicated topic. The scheme decision, which strategy to invest in, is the one that should be based on your goals, time horizon and risk tolerance.
How PriLytics helps. PriLytics tracks the exact plan type, Direct or Regular, for every fund you hold, so the true cost difference is visible rather than buried in a factsheet. See holdings and returns.
Understanding this hierarchy prevents a common confusion: comparing the NAVs of a Direct plan and a Regular plan and assuming the higher NAV means better performance. The Direct plan's NAV is higher because it retains more of the returns (lower expense drain), not because it invests in different securities. The performance difference between Direct and Regular compounds over time and can amount to several lakhs over a 15-20 year SIP, purely from the expense ratio differential.