I strongly believe, financial literacy is best promoted by non-professionals. Kirti Desai who runs Bemoneyaware typifies this belief. Pleasantly surprised to learn so does Silki Gargh, a telecom professional from Varanasi, who runs loancalculators.She reviews loan products, creates calculators like SBI Maxgain Home Loan Calculator and writes on technology, computer security, online threats and virus attacks.The website is her attempt to explore, learn and share. This post is written by her.
Direct Plans of Mutual Funds were introduced from 1st January 2013 by different Mutual Funds Houses in India in compliance to SEBI’s mandate. A lot has been written about the benefits of Direct Plan Mutual Funds for financially savvy investors, who can choose the best available fund for them and can go through the hassles of filling the application forms and depositing them to AMC or CAMS office.
But even after a period of 3 months from the launch of the Direct Plans, a lot of investors are still sitting with their Regular Plans earning less returns than what they could actually get by switching to the Direct Plans. The reason may be several like…
- Not being aware about the Direct Plans in the first place
- Not being aware about the big difference this small move can make in their overall return
- Not knowing how to switch to the Direct Plan
- Capital Gain and other Tax implications, forcing them to remain invested at least for one year
- Fearful about losing the services of their financial planners and distributors
- Or just plain procrastination.
Whatever be the reason, we request all the investors to give this issue a serious thought, because the difference on the overall returns generated from a Regular Plan and a Direct Plan over a long period are too huge to ignore.
The purpose of this post is to highlight this difference by taking actual NAVs of some of the popular Mutual Fund Schemes. It is a good time for this review exercise as one quarter of the year of the launch of the Direct Plan Mutual Funds has already passed.
Example of HDFC Mutual Funds – The Largest Fund House in India
HDFC Mutual Fund is the largest Mutual Fund House of India with some of the most popular schemes like HDFC Top 200, HDFC Growth Fund, HDFC Tax Saver Fund etc. under its belt. The expense ratio structure for some of their popular Diversified Equity Mutual Funds is as follows.
Expense Ratio for Regular Plans
- On the first 100 crores daily net assets 2.50%
- On the next 300 crores daily net assets 2.25%
- On the next 300 crores daily net assets 2.00%
- On the balance of the net assets 1.75%
- In addition to the above a charge of 20 bps on the daily net assets plus a proportionate
charge in respect sales beyond T-15 cities subject to maximum of 30 bps on daily net assets
- This is excluding Service Tax on Investment Management Fees, if any.
Expense Ratio for Direct Plan are lower by about 0.52% to 0.59%.
|Name of the Scheme||NAV as on 28th Mar. 2013|
|HDFC Top 200 – Regular Plan||210.4850|
|HDFC Top 200 – Direct Plan||210.7820|
|HDFC Tax Saver – Regular Plan||225.3300|
|HDFC Tax Saver – Direct Plan||225.6950|
|HDFC Equity – Regular Plan||271.1090|
|HDFC Equity – Direct Plan||271.5280|
|HDFC Growth – Regular Plan||87.6560|
|HDFC Growth – Direct Plan||87.7640|
As you can see from the table above, the difference between the NAVs of the two plans of the same scheme is about 0.13% – 0.16%. Remember that these are the result of performance of one quarter. We can safely assume this difference to become about 0.50% to 0.70% in the full year. Let us assume a figure of 0.60%.
How Big is the Difference in Returns
Although the difference in returns of a Direct Plan vs. a Regular Plan Mutual Fund looks like a small figure of just 0.60%, but it can create a huge difference in the long run. This of course is due to the magic of compounding.
I have compared the returns from a Direct Plan vs. a Regular Plan Mutual Fund using this Excel file. Following is the result.
- One time Lumpsum investment: Rs. 1,00,000/-
- Assumed Rate of Return: 15%
- Period: 25 Years
- Difference in the Expense Ratio: 0.60%
- Return from Regular Plan: Rs. 28,32,081/-
- Return from Direct Plan: Rs. 32,91,895/-
Difference of Rs. 4,59,815/- i.e. a whopping 14%. Can you afford to ignore such a huge difference? Would you still procrastinate and not switch your mutual fund investments in the Regular Plan to the Direct Plan.
We have shown the example of HDFC Mutual Fund in this post. Please note that the expense ratios of other AMCs are also in the similar range and the above analysis holds good for all of them. We encourage you to download the MS Excel Template file available on this website and do the calculations yourself to see the actual difference in different conditions.