# Mutual Fund Returns Comparison: Direct Plan vs. Regular Plan

Published: August 5, 2013 at 6:00 am

Last Updated on December 18, 2021 at 10:48 pm

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.

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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:

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

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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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