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.
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!
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:
- Impact of MF Expense Ratio Calculator (I will post an updated version soon)
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
- Should We Switch To Direct Mutual Fund Plans? Calculate and Consider
- On Direct MF Plans, Ethics, Conflict of Interest and All That Sort of Thing
- Step-by-Step Guide to Selecting a Mutual Fund
- Comparing SIP Returns: Monthly vs. Daily vs. Quarterly SIPs
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
- We are also on Google Plus and Pinterest
Do check out my books
My first book is now available at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now . The Kindle edition is only Rs. 199.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is now only Rs 199 (Kindle Rs. 99) Get it or gift it to a young earner
The ultimate guide to travel by Pranav SuryaThis is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
Free Apps for your Android PhoneAll calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)