Mutual Fund Returns Comparison: Direct Plan vs. Regular Plan

Published: August 5, 2013 at 6:00 am

Last Updated on

It is now seven months since direct mutual fund plan were introduced. Using NAV history of HDFC Top 200, I have calculated the actual difference in returns between the regular-plan and direct-plan (growth option) obtained so far (Excel sheet attached).

Let use recall that regular funds will have a higher expense ratio than direct funds.  A typical expense ratio breakup can be found here: Should We Switch To Direct Mutual Fund Plans? Calculate and Consider

First let us look at how the difference between direct plan NAV and regular plan NAV looks like as a function of time.

nav difference

Notice that the NAV difference is a straight line for a good part and then deviates a bit. This is because the difference in expense ratios has decreased a bit. On 25th Jan it was 0.59%. The difference is currently 0.55%

Assuming I have invested some sum on Jan 1st 2013 (I actually did!) I have calculated the internal rate of return on a daily basis using Excels IRR function. I have then calculated the difference in IRR between regular and direct options and converted it to an effective annualized CAGR difference. This is plotted below as a function of time.


This suggests that HDFC Top 200 direct has approximately 0.5% higher (annualized) return than HDFC Top 200 Regular fund (if the regular fund has returned -5% then the direct fund has returned -4.5%!). Thus the difference in return is approximately equal to the difference in expense ratios.

How do we make sense of this? Suppose I say, this 0.5% difference will approximately remain the same whether you invest for 1 year or 10 years,  is it good news or bad?

Many people view this as bad news? What! Only 0.5% difference in returns? Why should I bother with direct mutual fund then?

This result is so counter-intuitive  that on another occasion, I heard this ‘what, only 0.5%!?’ response, from an expert who constantly writes on compounding!

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The correct statement is, the difference in returns is 0.5% for each year of investment.

If I invest a sum in HDFC Top 200 Regular and Direct:

  • after 1 year: If the regular fund has a value A, the direct fund will have value (approximately)
    • A x (1+0.5%)
  • after 3 years: If the regular fund has a value B, the direct fund will have a value (approximately)
    • B x (1+0.5%) x (1+0.5%) x (1+0.5%) and so on.
  • In the above I have assumed 0.5% as a constant difference in expense ratios. If this difference is 0.5% in year 1, 0.4% in year 2 and 0.6% in year 3 then we will have:
    • B x (1+0.5%) x (1+0.4%) x (1+0.6%)

So if someone has the disciple to stay invested for a long period of time in a ‘good’ fund then can be a significant difference in corpus.

For example, in the above example,

  • after 5 years, the direct fund value will be about 2.5% higher than the regular fund.
  • after 10 years, the direct fund value will be about 5% higher than the regular fund.

This is an approximate illustration. Use this calculator for a more accurate estimate:

Download the HDFC Top 200 Direct vs. Regular Returns Comparison Excel File


Note: I have also calculated the annualised return (CAGR) on a daily basis using Excels XIRR function. The difference between XIRR for direct and regular funds will also give the annualized return difference directly. This difference is a little higher than the one calculated with IRR.

Credits: NAV history from Personalfn

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman 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.
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  1. Dear Pattu, thanks for the calculations as usual. Can you recall one of our old discussions in JI forum, where it was me who quoted that this difference in NAV ‘ll result in higher result & at that time, you were in doubt? Although You had already created your Expense Ratio Impact calculator before that. 🙂

    Your current post is now proving that original stand that in the long run, direct funds ‘ll outperform over regular funds.



  2. Dear Pattu,
    One thing, I must point out that for last 4 years it has been observed that HDFC TOP 200 has been a laggard in its category. So, where do the philosophy of direct plans take the investors if there is an outpeformance of only 1% is shown by any other regular plan promoted by FA?

    1. Dear Amitesh,

      First HDFC Top 200 IS being promoted by many FAs. That aside, you cannot compare HDFC Top 200 with another fund wrt to this discussion. It has to be between the regular and direct options of the same fund.
      As mentioned that the fund chosen has to be a consistent good performer.

      HDFC top 200 is indeed one such fund. Wrt to fund, every fund will go through such a lean patch (even in that lean path the direct option will be higher in return)

      Investor must first identify ‘good’ funds and then choose the direct option. Anyone can choose a good fund by spending a little time and effort.

      Of course FAs will make statements like, “those who cannot choose funds on their own should stick to their FAs”. This is plain conflict of interest. If an investor confuses such statements for ‘financial literacy’ then I have nothing good to say about such behaviour.

  3. Dear Ashal,
    Yes, I was thinking about that discussion when I wrote this. In this post I have assumed that the date of investment is 1st Jan when the NAV difference is practically zero.

    After 10 years or some if we make a fresh comparison, the NAV difference on the date of investment itself will be pretty large.

    If I then make a comparison after, say, 5 years, the quantum of return difference will largely depend on the rate at which the NAV difference grows.

    I will agree that it likely to be positive. However it can be small if the rate of NAV difference slows down due to a continuous decrease in expense ratio difference. Although a long shot, it is possible.

    Moral of the story is, those who switch early to direct funds are likely to see a higher return difference (wrt regular funds) than those who switch late.

    1. one more point for switching to direct from regular is for how much time you want to keep the investment in the same mf , as irrespective of your holding period in regular scheme , you have to doll out the STT applicable, which at least , should be compensated with the benefit of direct during the holding period in direct scheme. is not?

  4. Pattu Ji

    I am very much impressed with your clear and unbiased views of mutual fund
    I am planning to invest lumpsum only,as sip are through a agent and I dont want to disturb that as the agent is very helpful to me in sticking to the agreed path
    so for direct plans which you have in mind -for say 10 yrs ,as i am the 100% equity guy and had withstand votality by not checking the prices in 2008 , 2009 and presnt timeframes by not looking at prices reported 🙂

    so need your valuable inputs , I will not keep you hold for same in case price drops the moment I invest but just want to check where to start with I have read your article on how to select mutual fund and there 4 schemes are pretty much you like ,so apart from those if you have any thing in mind


    1. Thank you. There is no need for any new fund. Choose the direct option of any of the funds you have already invested in as per your advisors instructions. Just choose the direct option if you wish to. The step by step guide is a simple method for choosing funds. If using this you find that you are already invested in these funds then invest more in these.

      But first have a goal in mind and integrate all your investments with your goals.

  5. Though I would want to move my investments to direct plan, the only think keeping me back is 3-4 userid/passwords from different AMC. My family is not that tech savvy and they have hard time remembering single username/password. You have to plan for the eventualities and I haven’t seen any simple solution for this. Any ideas?

    1. Dear Ashok,

      You will need only about 2-3 max AMC accounts. I use a password manager like Roboform for all my passwords. For the sensitive ones like MFs and banking I have a master password which we will need to remember. When choosing the master password, I asked my wife to suggest it. She gave me on which she uses in all her email/FB accounts. She never handles any of the transactions.

      In any case in case of an eventuality no one should access the account anyway! What is important is that you list down all your investments and SIP in one place and inform your family about it.

      1. may not be relevant, but i like to know how sensitive a password for mf. as i understand , mf is not transferable , so nobody can transfer units from the account. as far as sale/redemption concerned , the proceeds would be credited to the holder’s account. am i missing any thing? this is just for personal knowledge. of course , that for bank account is sensitive, as understand.

        1. Yes you are correct. I don’t how hackers work. It maybe possible to get the MF password and change the bank details to another one. It is beyond me. Yes as you mentioned there is a higher level of safety in an MF. Needless to say it is best to be careful about these things.

  6. Dear Pattu

    Few of my office mates still thinks regular fund is better direct one. i had advised them earlier . This article helps them to get clear cut knowledge.

    Thanks and best Regards
    Jeetandar Ojha

  7. I have a doubt here.My sip in HDFC Top 200 will be over next month.I would like to continue sip and change to direct this will be treated as new investment or it added to my investment till now?IF it is considered as fresh investment,am i going to miss the affect of compounding?

    1. Dilip,

      A sip is a like a monthly lumpsum. Each installment compounds independently. So if you switch to the direct option, compounding will not be interrupted. You will have both the regular fund and the direct fund compounding independently.

    1. Of course growth option direct fund will outperform regular funds! Why bother about dividends? There is absolutely no use in investing in dividend option equity funds. Instead once can invest in good dividend stocks.

  8. I have a GMAIL account through which you have access to 15 GB online space. My google account has 2 step verification which means even if someone tries to login that includes me as well from any unregistered computer or device it asks for a OTP which is received only on your mobile.

    I have created in Google Drive a Spreadsheet which takes care of all my passwords tab wise like banks, investments, personal, insurance, education, bills/utilities etc.

  9. Hi Pattu,
    I’ve an investment account with Citibank and invest in a few MFs through that. Does this mean I’m investing under “regular plan” here? Is Citibank acting as an agent?

    1. Very likely they are the brokers and it is a regular plan. Check your account statement for ‘broker code’. Anything other than ‘direct’ is ‘regular’!

  10. Hello Pattu Sir,

    I’m investing in mutual funds regular plan as a lump sump since last 3 years. I wanted to accumulate total 5 crores in 18years time for all my goals. Can you please calculate how much diffference/variation will be there in the final corpus if i invest in direct plans or regular plans. why i’m asking because my family is not so tech savy and conversant with finance, if the final corpus is not much difference then better to continue with regular plans.

    Thanks in advance sir.

    Shaji unni

    1. Hi Shaji, for every lakh of investment, you can expect 22,000 more in direct plans. My advice to you would to use direct funds in consultation with a fee-only planner.

      1. Thanks for the reply. It is coming to around 1cr rs difference. Are you sure sir for 18 years period you will have so much difference in total corpus if put in direct plan.

        Shaji unni

        1. I calculated Rs. 22,000 difference for every Lakh of investment over 15 years. It still a huge difference. Each year there will be a 0.5% difference between direct and regular funds. This 0.5% will compound with time and lead to such a large difference.

  11. Hi,

    THanks for providing great details and responses. I am a beginner and recently started SIP through 3rd party website like fundsindia. All my MFs are being managed through the same website and it is likely they are regular plans.

    Could you let me know how can I shift to Direct plans? Will I be able to do that.
    If I do that I cannot use that website anymore right? or can I still use their service
    Please advice how I should do this transition.

    1. You cannot invest in direct plans in FundsIndia. If you wish to shift to direct plans, get an account from the amc (use ‘existing investor’ option) with your folio no and then shift the units in regular fund to direct plan. It is like switching from one fund to another. So it will be subject to exit load if any and taxation rules apply (if relevant).

  12. Hi Sir,
    This was very insightful.

    1)I have HDFC Securities account. It provides option to buy MF of any AMC online. I see that they did not charge me any fees. I was also able to buy DIRECT plan from HDFC Sec. (I thought direct plans can be bought only from AMCs). They are not letting me start SIP in MFs though. Is there something I am missing here? How is HDFC Sec making money? Will they charge me later?
    2) I am not able to find expense ratio of DIRECT plan for MFs. All sites morningstar, valueresearch, etc show different percentage amount! I also went to AMC site directly and could not find info in some cases. If possible and if not much work can you please share with me current expense ratios of plans i selected? or can you share any document if you may maintain on expense ratios?
    3) I see that most of financial planners suggest GROWTH option in MF. But, I am assuming that i`ll be re-investing dividends.And even if i don`t reinvest dividends, NAVs of div payout schemes also increase,rt? its not that all money is distributed in div. I am thinking that if growth plans grows 15% YoY, Div plan may grow 14% (15%-1% of div). It may look more due to compounding over years. Are there any other disadvantages? Are there any fees involved?

    1. 1) what is the EXACT name of your mutual fund plan? Does it contact ‘direct’ in it?
      2)VR gives for some funds
      3) A div reinvest in equity does not have much of disadvantages but does not mean it is the simplest one!

      1. [1] Name of funds and their ISIN
        1. Franklin India Smaller Companies Direct Dividend – iNF090i01i09
        2. ICICI Pru Value Discovery Fund – Direct Plan – Dividend Payout – INF109K011K3
        3. UTI equity fund (D) – iNF189a01053 (I did not find Direct word in this scheme)
        4. HDFC Balanced Fund – Direct Plan – Dividend Payout option – iNF179k01ux2
        5. Tata Balanced Fund Direct Dividend Payout – iNF277k01mL6

        [2] I already checked on VR, but i saw that expense ration shown on VR was different than shown on Morningstar, moneycontrol.
        [3] I am not looking for ‘div reinvestment’ option, i am looking for ‘dividend payout’ option. I want to understand how much loss will i make if i choose divident payout over growth option.

        1. Mr. Pattu, I downloaded and used your ‘Integrated Financial Planner’ excel. Are you awesome or what! Wow! It`s a real eye opener for someone ‘oversmart’ like me who thinks he can retire at 45!…now i can`t even retire at 55!
          Hats off to you, Sir.

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