Direct Mutual Fund NAV is higher so Investors will get less units: Is this bad?

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One question that new investors ask is, “since the NAV of a direct plan mutual fund is always higher than that of the regular plan, I will get a lesser number of units for the same investment. Is this not bad? Will I not get lower returns and lesser corpus?” In this article, we shall see why buying a lesser number of direct plan units will not affect investors and they will always get a higher return and higher corpus than regular plan investors.

Many distributors also prevent investors from buying direct plans by this misrepresentation (lesser units = lesser benefits). Investor can and should complain to AMFI about such distributors. It is precisely for such conflicts of interest that investors should immediately get rid of their distributors and move to direct plans. The extra return in direct plan is only a secondary benefit. Investors should either DIY and invest in direct plans or work with a fee-only SEBI registered financial advisor and invest in direct plans. Here is a list of such advisors to choose from. 

For the uninitiated, in a regular plan, each day the AMC removes expenses and commissions from the assets before they publish the NAV. They do not remove such commissions in the direct plan and hence the direct NAV is always higher resulting in a significant benefit over the long term: Returns & corpus lost to commissions in regular plan mutual funds: 6th anniversary report

Direct Mutual Fund NAV is higher so Investors will get less units: Is this bad?

Direct Mutual Fund vs Regular Mutual Fund: Units and Returns comparison

We shall use the same study as in the above report to show how direct mutual fund investors will always benefit. A comparison of regular plan and direct plan of five mutual funds is shown below.

Direct Mutual Fund vs Regular Mutual Fund: Units and Returns comparison

Take the case of Mirae Emerging Fund. The direct plan investor who started a Rs. 1000 SIP no 2nd Jan 2013 would have a corpus which 6.4% higher than the regular plan investors (we consider investment up to Jan 2019). However, the direct plan investor has 2.1% lesser number of units. Despite that, the corpus is higher, and the return is almost 5% higher. The situation for other funds is also similar and can be read off the chart.

Why is this so? How can lower number of units result in higher returns?

To understand this, we should consider the rate at which the NAV of the direct plan increases over and regular plan and the rate at which the regular plan investors accumulates more units than the direct plan investor. Shown below is the case for HDFC Mid Cap Opportunities Fund (this is a recent review of the fund).

rate of growth of the direct plan NAV and rate of growth regular plan units

The blue line represents the rate at which the direct plan NAV grows over the regular plan. On 2nd Jan 2013, both plan NAVs were the same. So we start ay 0%.

The orange line represents the rate at which the regular plan investor accumulates more units than the direct plan investors. The key observation here is that the NAV difference is much higher than the unit difference and is growing at a higher rate.

As a result, even though the direct plan investor, accumulates lower number of units, because the NAV is higher, the corpus will always be higher and returns will always be higher. There is no need for direct plan investors to fear higher NAV and delay switching to regular plans. They should do so immediately.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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