We have performed an analysis on regular vs direct plan for mutual funds and in this article, we will shed light on the performance of mutual funds via regular and direct plan.
First, let’s look at an example.
Getting back to our analysis, we have chosen three major types of mutual funds, namely Large-cap, ELSS and Debt funds.
We have chosen Mirae Asset India Equity Fund (Mirae Asset India Opportunities Fund) as our Large-cap fund, Axis Long Term Equity Fund as our ELSS tax saving fund and L&T Low Duration Fund as our Debt fund.
Funds which invest a larger proportion of their corpus in companies with large market capitalization are called large-cap funds.
An ELSS is a diversified equity mutual fund which has a majority of the corpus invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns from the equity markets. This type of mutual fund has a lock-in period of 3 years from the date of investment.
A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.
Before we go any further, we need to first understand what direct and regular plans for mutual funds are.
Direct mutual fund plans were introduced by the Securities and Exchange Board of India (SEBI) in January 2013. It made mandatory for all mutual fund houses to launch ‘Direct Plans’ for all schemes.
Regular Plan V/S Direct Plan
Expense Ratio of Regular Plan vs Direct Plan compared.
|Regular Plan||Direct plan|
Mirae Asset India Equity Fund
|Axis Long Term Equity Fund||1.77%||
|L&T Low Duration Fund||0.90%||
You might have also noticed that the NAV(net asset value) of a direct plan may be higher than that of regular plans and may think that this will affect your returns.
But, this confusion is mainly because many investors treat NAV of a fund like the stock price.
This is a misconception. The NAV of a fund just reflects the value of the portfolio of the fund, whereas the traded price of a stock could be lower or higher than its actual value.
The reason for investing in direct plans is simple: they save money on distribution and that money invested can offer superior returns over a long period.
In our analysis, we have taken the time period of investment from January 2nd 2013 to December 2nd 2017, i.e. 5 years. the SIP amount to be paid for every month for 5 years is Rs 2000. Therefore, the total investment over a period of 5 years is Rs 1,20,000.
Result of The Analysis:
If we compare the returns of direct and regular plans we see that the returns of the direct plan is more. In case of Mirae Asset India Equity Fund, the final return amount after 5 years was Rs 2,04,846.734 for direct and Rs 2,00,114.738 for regular.
In the case of Axis Long Term Equity Fund, the final return value in 5 years is Rs 2,04,995.8672 for the direct plan and Rs 1,98,084.3352 for the regular plan. For the L&T Low Duration Fund, the returns are Rs 1,51,507 for the direct plan and Rs 1,50,255.10 for the regular plan.
Hence we observe that the returns for the direct plan is always greater than the returns for the regular plan. Hence, direct mutual fund plans make a positive difference to your investments every year. The direct plans generate roughly 0.5% to 1.0% additional returns every year.
However, if you sow seeds of these small savings, you may harvest rich rewards over 15- 20 years, thanks to the power of compounding.
All About Direct Mutual Fund Plan
With the direct mutual fund, you eliminate the middleman. And directly route your money into mutual funds. There is no guidance of the advisor/ agent.
You do your own research or bank on external research reports.
The transactions can be performed online or even physically by visiting the registrar’s or the asset management company’s office.
And since, transactions are routed directly; no commissions are paid by the fund house on the money you invest. Hence, the expense ratio for a Direct Plan is lower as compared to Regular Plan.
All About Regular Mutual Fund Plan
Regular Plan, on the other hand, is the conventional kind of plan, where you invest/transact through a mutual fund distributor or an agent. You are guided by this middleman and he performs all the operational tasks for you.
The fund house pays commission on the money you invest to distributors or agents. Due to this distribution cost, you incur a higher expenses ratio in a regular plan. Fund house pay commission on the money you invest to distributors. Due to this distribution cost, you incur a higher expenses ratio in a regular plan.
Disclaimer: The views expressed of this post are that of the author and not those of Groww