Returns & corpus lost to commissions in regular plan mutual funds: 6th anniversary report

Published: January 11, 2019 at 10:32 am

Last Updated on

Jan 1st 2019 marks the sixth anniversary of introducing direct plan mutual funds (where no commissions are removed daily from invested value before publication of NAV). This is the returns and corpus lost to commissions by not switching from regular plans (where commissions are removed) to direct. Please show this to your friends who still believe someone else is paying the bank or “advisor”.

Note to mutual fund distributors: Please do not waste your time reading this article or getting worked up about it. This article or your getting angry about it will not make any difference to the direct plan AUM. If you react, it will only make the article popular and me more determined. Cheers!

I used to publish direct plan anniversary reports up to 2017 See: Direct Mutual Fund vs. Regular Mutual Fund: 2017 Performance Report but took a break in 2018. The current post is inspired by SEBI Registered investment advisor Avinash Luthria’s wonderful article in The KenExorbitant annual fees and commissions to distributors are hurting Indian mutual fund investors. There is a solution, but don’t expect your local distributor to tell you about it (this requires payment to read, but free registration allows you to read a 200 word summary)

The commission structure in mutual funds is fraudulent in my opinion and the culprit is SEBI. They have let AMCs, and sales guy give the impression to the investor that commissions come from profits instead of the truth: AMC profit and commissions are different components of the total expense ratio. Every day, the AMC deducts three components from the current value of our investments in a regular plan: their profits, their expenses and commissions to be paid out. Repeat every day, whether or not you invest again, whether the market moves up or down.

There is no transparency in commission calculation. Commission disclosure alone is not enough. Knowledge of how it is deducted is essential and no one, including the SEBI and the media is doing enough.

As I had argued in this Economic times’ article, trail commissions must be banned and replaced by an entry load. So if I invest Rs. 100, Rs. 98 gets invested and Rs. 2 is paid out as commissions. This is made clear to the investor right from the start. This is the right way to pay upfront commissions (AMCs can pay upfront trail commissions to distributors on SIPs and adjust it in their books later). Pigs might fly before this comes to pass.

There are two problems associated with mutual fund total expense ratios. We discussed one above. I associate the second with the profit component of the AMCs and this is hard to lay a finger on. Everyone will accept there is something fishy going on, but it is hard to prove anything. I for my part tried with help from a friend: Mutual Fund Expense Ratio: Direct Plan vs Regular Plan. One suspicion is that AMCs have been using the fungibility between expense ratio components for their and distributors benefit.  This however was removed in 2018 and the gap between regular plan and direct plan widened for many schemes.

There is however a long way to go to ensure investors understand what they are paying for. As long as AMCs depend on sales guys for profit (as Avinash explains), that will never happen suddenly. The only hope is that we are moving in the right direction.

cover page of regular plan vs direct plan 6th anniversary report

Return difference between regular plan and direct plan funds

Before we begin, let us answer the FAQ

Who should use regular plan mutual funds?

No one. It is 2019 folks, time to grow a brain.

Who should use direct plan mutual funds?

Everyone who wants to invest in a mutual fund.

But I will get lesser units in direct plans na?

Yes, so what? If you think lesser units means lesser corpus and lesser returns, your understanding of how mutual funds work is “lesser”. If you want numbers, wait for a post on this. Let me milk this topic dry!

But return difference is less in my fund na?

Your understanding of how small differences became huge with time is also “less”. If you use the six-year data presented below and extrapolate, it might help.

Corpus and return difference since inception of direct plans

Using the freefincal financial goal and mutual fund tracker, one can easily compute this:

Returns & corpus lost to commissions in regular plan mutual funds: 6th anniversary report

I hope those numbers provide enough proof as to why you should switch. If you stay invested in a regular plan fund for 10Y. you will lose 10% of your investment to commissions. At least long-term capital gains tax on equity has a 1 lakh tax free threshold before the 10% tax on gains is applied. Please understand that this 10% (~ 1% a year) applies on the entire amount invested.

Want help in switching? Read: How to Invest in, or Switch to Direct Mutual Fund Plans

Current expense ratio difference between regular plan and direct plan (top 20)

Source: Value Research. The full data set of all the lists presented is available as an excel file below.

ER difference = TER (regular plan) – TER (direct plan)

FundER Difference %
IDFC Core Equity Fund – Direct Plan2.14
Tata India Consumer Fund – Regular Plan1.68
Mirae Asset Tax Saver Fund – Regular Plan1.68
Axis Multicap Fund – Regular Plan1.66
Tata Multicap Fund – Regular Plan1.48
Axis Focused 25 Fund – Direct Plan1.47
IDFC Multi Cap Fund – Direct Plan1.47
HDFC Small Cap Fund – Regular Plan1.45
Tata Large & Mid Cap Fund – Regular Plan1.43
Invesco India Growth Opportunities Fund1.4
Axis Bluechip Fund – Direct Plan1.4
Mirae Asset Emerging Bluechip Fund – Regular Plan1.39
Axis Midcap Fund – Direct Plan1.38
HDFC Capital Builder Value Fund – Direct Plan1.35
Kotak Emerging Equity Scheme Regular Plan1.34
Franklin Build India Fund – Direct Plan1.34
L&T Emerging Businesses Fund – Direct Plan1.31
ICICI Prudential Pharma Healthcare And Diagnostics (P.H.D) Fund – Direct Plan1.28
ICICI Prudential Manufacture in India Fund – Direct Plan1.28
IDFC Focused Equity Fund – Direct Plan1.24

Three year SIP return difference (top 20) for equity funds

In what follows, the difference in return between regular plan and direct plan fund is presented using Value Research Tables.

3Y Difference = 3Y SIP Return (Direct Plan) – 3Y SIP Return (Regular Plan). Here 3Y = last three years.

Fund3Y Difference %
Tata India Consumer Fund – Regular Plan2.07
Invesco India Financial Services Fund – Direct Plan2.07
Tata Digital India Fund – Regular Plan2.01
Invesco India Mid Cap Fund – Direct Plan2
Invesco India Largecap Fund – Direct Plan1.96
Tata Banking and Financial Services Fund – Regular Plan1.96
Invesco India Infrastructure Fund – Direct Plan1.94
Tata Resources & Energy Fund – Regular Plan1.9
Indiabulls Value Discovery Fund – Regular Plan1.89
DHFL Pramerica Diversified Equity Fund – Regular Plan1.89
DHFL Pramerica Long Term Equity Fund – Regular Plan1.87
IDBI India Top 100 Equity Fund – Direct Plan1.86
IDFC Focused Equity Fund – Regular Plan1.86
Indiabulls Bluechip Fund – Direct Plan1.83
Invesco India Multicap Fund – Direct Plan1.83
BNP Paribas Multi Cap Fund – Direct Plan1.82
Essel Large & Midcap Fund – Direct Plan1.82
Invesco India Tax Plan – Direct Plan1.82
IDBI Equity Advantage Fund – Regular Plan1.81
Invesco India Growth Opportunities Fund – Direct Plan1.8

One year SIP return difference (top 20) for equity funds

1Y Difference = 1Y SIP Return (Direct Plan) – 1Y SIP Return (Regular Plan). Here 1Y = last one year.

Fund1Y Difference %
IDBI Focused 30 Equity Fund – Regular Plan2.33
IDBI Small Cap Fund – Regular Plan2.28
Mahindra Mutual Fund Badhat Yojana – Regular Plan2.12
Mahindra Mutual Fund Kar Bachat Yojana – Regular Plan1.96
Tata India Pharma & HealthCare Fund – Regular Plan1.86
DHFL Pramerica Diversified Equity Fund – Regular Plan1.82
DHFL Pramerica Long Term Equity Fund – Regular Plan1.81
IDBI Midcap Fund – Regular Plan1.77
Invesco India Financial Services Fund – Direct Plan1.75
IDBI India Top 100 Equity Fund – Direct Plan1.74
Invesco India Mid Cap Fund – Direct Plan1.71
Essel Long Term Advantage Fund – Direct Plan1.7
Axis Multicap Fund – Regular Plan1.69
Invesco India Largecap Fund – Direct Plan1.69
Tata Digital India Fund – Regular Plan1.68
Tata Banking and Financial Services Fund – Regular Plan1.65
Essel Large & Midcap Fund – Direct Plan1.65
DHFL Pramerica Global Equity Opportunities Fund – Direct Plan1.64
Tata India Consumer Fund – Regular Plan1.6
IDBI Equity Advantage Fund – Regular Plan1.57

Five year SIP return difference (top 20) for equity funds

5Y Difference = 5Y SIP Return (Direct Plan) – 5Y SIP Return (Regular Plan). Here 5Y = last five years.

Fund5Y Difference
Invesco India Mid Cap Fund – Direct Plan2.09
Invesco India Financial Services Fund – Direct Plan2.08
Invesco India Infrastructure Fund – Direct Plan1.99
Invesco India Largecap Fund – Direct Plan1.96
Invesco India Multicap Fund – Direct Plan1.92
Indiabulls Bluechip Fund – Direct Plan1.89
Invesco India Growth Opportunities Fund – Direct Plan1.89
Invesco India Tax Plan – Direct Plan1.88
BNP Paribas Multi Cap Fund – Direct Plan1.86
Invesco India PSU Equity Fund – Direct Plan1.85
Kotak Infrastructure and Economic Reform Fund – Standard Plan – Direct Plan1.82
Invesco India Contra Fund – Direct Plan1.79
IDFC Focused Equity Fund – Regular Plan1.78
BNP Paribas Midcap Fund – Direct Plan1.77
IDFC Core Equity Fund – Regular Plan1.74
IDFC Infrastructure Fund – Regular Plan1.73
Tata Large Cap Fund – Regular Plan1.71
Kotak India EQ Contra Fund – Regular Plan1.68
DHFL Pramerica Large Cap Fund – Direct Plan1.67
Tata Large & Mid Cap Fund – Regular Plan1.62

Three year SIP return difference (top 20) for aggressive hybrid funds

3Y Difference = 3Y SIP Return (Direct Plan) – 3Y SIP Return (Regular Plan). Here 4Y = last three years.

Fund3Y Difference
Mirae Asset Hybrid Equity Fund – Regular Plan1.93
Baroda Hybrid Equity Fund – Direct Plan1.58
Reliance Equity Hybrid Fund – Direct Plan1.55
Sundaram Equity Hybrid Fund – Regular Plan1.53
Kotak Equity Hybrid Fund – Regular Plan1.48
LIC MF Equity Hybrid Fund – Direct Plan1.48
Tata Hybrid Equity Fund – Regular Plan1.48
DHFL Pramerica Hybrid Equity Fund – Direct Plan1.47
Franklin India Equity Hybrid Fund – Direct Plan1.46
Canara Robeco Equity Hybrid Fund – Regular Plan1.44
ICICI Prudential Equity & Debt Fund – Direct Plan1.44
Tata Retirement Savings Fund – Moderate Plan – Regular Plan1.35
Principal Hybrid Equity Fund – Direct Plan1.33
Aditya Birla Sun Life Equity Hybrid ’95 Fund – Direct Plan1.29
LIC MF Unit Linked Insurance – Direct Plan1.29
DSP Equity & Bond Fund – Direct Plan1.19
L&T Hybrid Equity Fund – Direct Plan1.15
HDFC Children’s Gift Fund – Direct Plan1.13
SBI Equity Hybrid Fund – Direct Plan1.12
ICICI Prudential Child Care Fund – Gift Plan – Direct Plan0.93

One year SIP return difference (top 20) for

aggressive hybrid funds

1Y Difference = 1Y SIP Return (Direct Plan) – 1Y SIP Return (Regular Plan). Here 1Y = last one year.

Fund1Y Difference
IDBI Hybrid Equity Fund – Regular Plan1.81
HDFC Retirement Savings Fund – Hybrid Equity Plan – Regular Plan1.61
Sundaram Equity Hybrid Fund – Regular Plan1.61
Mirae Asset Hybrid Equity Fund – Regular Plan1.58
BNP Paribas Substantial Equity Hybrid Fund – Regular Plan1.56
Tata Hybrid Equity Fund – Regular Plan1.52
IDFC Hybrid Equity Fund – Regular Plan1.49
LIC MF Equity Hybrid Fund – Direct Plan1.31
Canara Robeco Equity Hybrid Fund – Regular Plan1.29
Baroda Hybrid Equity Fund – Direct Plan1.26
Tata Retirement Savings Fund – Moderate Plan – Regular Plan1.25
DHFL Pramerica Hybrid Equity Fund – Direct Plan1.23
LIC MF Unit Linked Insurance – Direct Plan1.18
Franklin India Equity Hybrid Fund – Direct Plan1.17
Kotak Equity Hybrid Fund – Regular Plan1.14
Reliance Equity Hybrid Fund – Direct Plan1.11
ICICI Prudential Equity & Debt Fund – Direct Plan1.09
HDFC Children’s Gift Fund – Direct Plan1.06
DSP Equity & Bond Fund – Direct Plan1
HDFC Hybrid Equity Fund – Direct Plan0.99

Five year SIP return difference (top 20) for aggressive hybrid funds

5Y Difference = 5Y SIP Return (Direct Plan) – 5Y SIP Return (Regular Plan). Here 5Y = last five years.

Fund5Y Difference
Kotak Equity Hybrid Fund – Regular Plan1.55
Baroda Hybrid Equity Fund – Direct Plan1.51
Franklin India Equity Hybrid Fund – Direct Plan1.49
Reliance Equity Hybrid Fund – Direct Plan1.49
DHFL Pramerica Hybrid Equity Fund – Direct Plan1.48
Tata Retirement Savings Fund – Moderate Plan – Regular Plan1.45
ICICI Prudential Equity & Debt Fund – Direct Plan1.44
Aditya Birla Sun Life Equity Hybrid ’95 Fund – Direct Plan1.32
Canara Robeco Equity Hybrid Fund – Regular Plan1.28
LIC MF Equity Hybrid Fund – Direct Plan1.27
Principal Hybrid Equity Fund – Direct Plan1.22
Tata Hybrid Equity Fund – Regular Plan1.2
L&T Hybrid Equity Fund – Direct Plan1.2
SBI Equity Hybrid Fund – Direct Plan1.19
Sundaram Equity Hybrid Fund – Regular Plan1.17
LIC MF Unit Linked Insurance – Direct Plan1.14
DSP Equity & Bond Fund – Direct Plan1.14
HDFC Children’s Gift Fund – Direct Plan1.05
ICICI Prudential Child Care Fund – Gift Plan – Direct Plan0.94
HDFC Hybrid Equity Fund – Direct Plan0.81

Download the full data set: 298 equity funds and 66 aggressive hybrid funds

Did you scroll down this far down? Then show me proof you did! Comment below or tweet to @freefcal what is (22x 10) +2  = ?

 

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  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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40 Comments

  1. 222 🙂
    On a more serious note, I believe it is difficult to reach all the investors without the advisors. We are a country that still depend on the LIC uncle and aunty.

  2. Assuming that you used the space to indicate association, the answer is 222. It can also be 22 * 12 if associated differently.

    The simple unfortunate fact is that direct plans are still a minority of Equity AUM, even in T30 markets. The investors are still used to ‘free, full, advice’ which is being offered under the guise of ‘incidental advice’ May be if SEBI really imposes the Mar 2019 date for choosing between distribution and advisory, the market would shake up and settle down one way or another.

    By the way I see websites happily proclaim both the numbers – RIA registration number and AMFI registration number, side by side.

  3. I have invested in Axis, Hdfc, franklin—all direct plans. In last few weeks I have received e mail where I find expense ratio going up rather than down. Could not figure out why.

  4. 222
    I think investors need to group up an make a representation to Sebin other authorities like amfi .Transperency in declaring commissions from the expenses is paramount.mf industry has to realise that there are matured investors who would like to assert their rights.

  5. 222

    My father’s mutual fund investments are all in regular plans. Though he has understood the benefits of direct plan, he values the comfort of buying mf through his demat account. I think he also feels his RM deserves some commission for the amount of time he spends assessing his MF performance etc. Nevertheless, my brother has changed everything to direct now.

    1. To each their own, however, the whole point is that an informed decision on what what “some commission” actually is, is not easy to make unless one digs deep. That is the problem.

      1. 222

        Have been a freefincal reader since beginning; there had been varied types of commenters! but mistaking Pattu for an LIC Agent, well that’s a first!

        How did he/she even come to this conclusion?

    1. Are you are not aware of Mutual Fund Utility and about 20 direct plan portals including Paytm?!! In any case, you dont need “one place” I have been a direct to amc investor for close to a decade

      1. Paytm money will not let you chose existing folios to invest. The best in this category is unovest website which is free for all and allows to use existing folio.

  6. I had started my SIP thru a distributor,and have now an investment of 11L, I dont mind the Distributor getting the commission as ‘is he not the guy who is the media of me building up this money’

    1. Dude, you are giving 1100000*1/100 = approx Rs.11000/- every year to your distributor. This will grow as your total investments grows in the coming years. Why not give 10K to him directly and ask advice? Or why not fund it for a new handset or reinvest it?

  7. I am an IFA, and believe you me – I laughed my guts out after reading this fairy tale. Show me one DIRECT investor who is running DIRECT MODE SIP for last 7 years first before making these calculations / assumptions. No, your articles does not affect us DISTRIBUTORs one bit – as there are enough investors who need hand-holding, investing basics, and human touch as backup for their investments. I respect your effort on knowledge sharing but sometimes they are misdirected. Best of luck, cheers

    1. If you are reading this blog you would know that the author is one. I missed only one month in the last 8 years as I was going to lose my job which I did not so that next month I invested 2 months equivalent. I dont even have a sip registered. I just invest on first working day of each month.
      But I agree with you. Very few of my friends and colleagues I advised shifted to direct. They didnt move not because they get great advice but they think it is too complicated.

  8. I first read your blog 2 years back when I was exploring MF for new investment and read Goal based investment is why important and difference between regular and direct plan. I also use your Robo template and xls which you share which are very help full. Cut down lot of research time. Is it possible to convert these xls in to app. I am Linux user and I find it difficult to use the xls here or you say Liberaoffice is having some issue some time.

  9. Investing directly or without advice is Investor Choice. Why does your article criticizes Only Advisory? I have also observed Limitations of fee based adviser
    who offers funds as per his understanding and skills and Customer also suffers if he gets a wrong fund.A Concise view is expected from your side.

  10. First things first …222

    I have, after reading your posts (and a fair bit of soul searching…)
    Revisited/Identified my goals.
    Identified the correct asset allocation for them based on tenure and “my” risk tolerance.
    Identified the correct MF categories for them.
    Picked up the consistent / (not best perhaps) funds based on rolling returns. std deviation (risk) etc
    Twiddled my thumbs till I re-balance my folio and repeat the above steps

    Thank you Pattu for everything in the journey so far…

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