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Direct Mutual Fund vs. Regular Mutual Fund: 2017 Performance Report

Jan 1st, 2017, marked the fourth anniversary of direct mutual funds plans. These are mutual funds you can buy without any commission, directly from the AMC, its aggregation portal MF Utility or one of the many new direct mutual fund + robo advisory portals. This is the fourth anniversary report.

If you are already a direct fund investor, please do consider sharing this article with your friends and colleagues who do not understand the difference and still losing money.

If you think you are no paying any charges by investing via your bank, stock broker or so-called "free portal", please think again. The commissions are paid by the AMC, all right. But where do they get the money to pay commissions from? They get it from your investment value. That is why so- called regular plans or any fund name with no "direct plan" appended to it have a NAV lower than direct plans.

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What about advice? Who will advise people who go direct?

Well here the options:

1: DIY (as long as you have what it takes). Invest directly with AMC or use MF Utility.

2: Consult a fee-only financial planner who is registered with SEBI as a Registered Investor Advisor,  pay a flat fee for advice and invest in direct plans. I have a list of such advisors.

3: Invest via robo advisory portal: Invezta and Kuvera (independent of MF Utility) or (Unovest, Orowealth, Bharosa Club, Wixifi, and a few more apps dependent on MF Utility). This needs to be updated (will do soon) Comparison of Direct Mutual Fund Transaction Portals

Do not listen to anyone who says that you cannot get "professional" advice if you invest in direct plans. Switch to direct plans from your bank, free portal, sharebroker and mutual fund distributor (some call themselves fee-only financial planners) TODAY!!

Want proof before shifting? This where this report comes in.

Exhibit 1A: Difference in NAV

The difference in NAV between HDFC Top 200 or HDFC Top 200 regular plan and HDFC Top 200 Direct Plannew-nav-difference

This is the price you have paid for "conveniently" investing via banks, share brokers and "free" portals. Make that, huge price.

Exhibit 1B: Difference in 1-Y SIP Returns

This is the extra return (in %) because of investing in direct plans. It may appear small now but will make a huge difference after a few years: Illustration: Direct Mutual Funds vs. Regular Mutual Funds

1y-sip-return-differece

If you wish to know how I generated this graph from value Research, consult last year's report: Returns Comparison 2016: Direct Mutual Fund vs. Regular Mutual Fund

The funds with lowest return difference are index funds!

Exhibit 1C: Difference in 3-Y SIP Returns

3y-sip-return-differece

Now, don't get misled by the fact the return difference is till the same over 3Y. This does not make it small. This is where compounding matters: The difference is the year-on-year difference in returns. So each year, the difference grows by that difference.

Exhibit 1D: 3Y vs 1-Y SIP Returns

3y-vs-1y

Notice the 3Y return difference falls in a straight line when plotted against the 1Y return difference.

To give you a rough estimate. If the difference in returns after 1Y is 0.8%, then

the difference in corpus = (1+0.8%) after 1Y.

the difference in corpus = (1+0.8%) x (1+ 0.8%)  after 2Y.

the difference in corpus = (1+0.8%) x (1+ 0.8%) x (1+ 0.8%) after 3Y and so on.

The 0.8% difference will be the same (for this simple illustration) but the amount you lose for each you avoid switching to direct will keep growing. See above illustration link.

SO ACT NOW!!

Exhibit 1E: Some Examples

For the last 4Y, I have tracked the difference in returns and excess corpus because of investing in direct plans.

Some results from past 3Y data published in the 2016 report.

Return-comparison-direct-fund-vs-regular-fund-2016-A

Return-comparison-direct-fund-vs-regular-fund-2016-C

Now after 4Y:

four-y-later

The return difference will be the same but the excess corpus will keep on increasing.

I repeat: ACT NOW: How to Invest in, or Switch to Direct Mutual Fund Plans

Ps. TRUST NO ONE: Not me, Not the amc, not your "advisor", not the media* - definitely not the media, not your fav mutual fund portal and the people who run it.  Check facts for yourself. THERE IS NO FREE LUNCH.

*: Dr Narendra Nathan from ET is the only exception that I can think of.

Seize the day!

Carpe-diem

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18 thoughts on “Direct Mutual Fund vs. Regular Mutual Fund: 2017 Performance Report

  1. Dilip

    Thanks for quite interesting anlysis.

    This analysis has been done for the SIP's.

    I am thinking from long term perspective - What about the fixed lumpsum investment made at random dates ? What will be the impact now and what will be impact say after few many years later?

    Expecting your view.

    Reply
  2. John Galt

    When you update the comparison of direct portals, could you also include information on how to switch existing folios from regular to direct and if any of the portals provide any support for the same?

    Reply
    1. freefincal

      You have to switch units such that they are free of exit load and tax (in case of equity). I will write a post about this.

      Reply
  3. SENTHILNATHAN JEYAKAMESWARAN

    Exhibit 1A: Difference in NAV ----> In this chart the left side values 0 to 10 -- refers % return?

    Reply
  4. SENTHILNATHAN JEYAKAMESWARAN

    So in layman terms, if the difference between Regular and Direct is 1% every year, and the investment runs for 10 years then difference between regular and direct return is 10% ?

    Reply
  5. pkaushal2014

    when doing so much legwork by "investing" in direct plan, y stop at that invest directly in share market. open a discount brokerage account at 0.01% each trade or just a flat fees of few hundred rupees and shave of at least 0.8% more

    Reply
  6. Dilip

    Thanks a lot.

    1. For exit load should be more than one year older- Correct?
    2. For tax liability also should be more than One year or so? or other aspects. I heard something about the Indexation. If you can show some example including the Indexation would be of great help.

    Thanks already !

    Reply
  7. Ankit

    Your whole logic of going direct is that it gives excess return. I hope someday you will also write about the average holding period of direct investor v/s investor who invest through distributor. if DIY investment is easy than by same logic one can learn driving by herself by reading books or referring statistics(read: historical performance). I am not against direct plans at all and they should be promoted equally by all the stakeholders but you are completely biased towards direct plans and that is why reader should be cautious. Disc: I am a IFA and suggest regular plans to my clients and earn income through commission.

    Reply
    1. freefincal

      lol! How right you are! My whole logic is about DIY and Direct! I never mention other options did not maintain a list of fee-only planner for 3Y etc.
      Please do not bother commenting again here. I will delete your comment.

      "Well here the options:

      1: DIY (as long as you have what it takes). Invest directly with AMC or use MF Utility.

      2: Consult a fee-only financial planner who is registered with SEBI as a Registered Investor Advisor, pay a flat fee for advice and invest in direct plans. I have a list of such advisors.

      3: Invest via robo advisory portal: ..."

      Reply
  8. Sreekanth

    Sir, you are of course biased towards "Regular" plans. Your logic of learning car doesn't appear logical at all. So, you want investors to hire people like you and feed you for ever irrespective of funds performed or not and that's why they should hire you without learning themselves. Why don't you hire a maid to bathe you? Why don't you hire a maid to stuff food in your mouth? Why you do "directly" yourself. How many of your clients received refunds from you when a fund didn't perform?

    Reply
  9. Anand Vaidya

    You earn commissions via regular funds. If there are people using your services, that's fine.

    Now, your car analogy is totally flawed. Here's the correct comparison:

    Say, you want to buy and keep a car for 15 years. Now you could buy "direct" from Maruti (AMC) and pay a one time price. You pay only service charges.

    Or, you buy the same car through an IFA, and every year, in addition to service charged from Maruti, they also deduct a 1% fee and pay to IFA who sold the car just once.

    Makes sense? Not to me.

    Reply

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