Direct mutual fund plans are those that do not have a trail commission component and should be purchased ‘directly’* from an AMC. These plans were introduced on 1st Jan. 2013. In this post, the returns of direct mutual funds are compared with ‘regular’ mutual funds (ones sold by distributors, banks, online portals etc.).
(*) This is changing rapidly! See below.
This exercise was also carried out last year: Direct Mutual Fund Option – The Second Anniversary Report.
I maintain an Excel file where I maintain SIPs of a few regular and direct funds. I present below the 3-year, 2-year, and 1-year SIP returns of those funds.
The SIP is for Rs. 5000 a month and the XIRR (the equivalent of CAGR for multiple investments) is calculated on the day the 12th (1Y), 24th (2Y) and 37th (~3Y) installments are completed.
The difference in returns bet direct and regular funds can vary widely among fund to fund. This is because expense ratio varies from fund to fund. So does the extent of commissions.
Even for the same fund, the difference will not be constant, since the expense ratio changes with AUM (decreases with increase in fund size).
This XIRR difference will settle down to a constant value. Remember that although the difference is small, it is for each year of investment. Suppose the difference is expense ratios is about 0.5% and the investment duration is 10 years, the approximate difference in corpus will be of the order of
(1+0.5%) x (1+0.5) x …… multiplied ten times.
If you like some projections into the future, try this: Illustration: Direct Mutual Funds vs. Regular Mutual Funds
Using Value Research SIP Returns Tool
You can get the above information for all funds using the Value Research SIP returns tool.
- In the VR main page navigate to the bottom left to Tool –> SIP Returns
- Go to fine tune your fund selection and uncheck direct plans, 3,2 and 1-star funds
- Select the fund category you want and update fund list.
You will get this
This can be used to compare 1-year and 3-year SIP return differences.
This is the 3-year return difference plotted against the 1-year return difference. The 3-year return is 1/3rd dependent on the 1-year return. The graph only illustrates that the return difference will more or less remain constan if low and will decrease if noticeably high. It is the corpus difference that will grow more and more as shown in the above table.
You can download the full processed list with data from VR as an Excel file: VR-SIP-returns-direct-Jan-2016.xls
If you are a DIY investor,direct is the ovious choice. If you are an investor in the need of professional help, then too direct is the obvious. Just that you need to consult a SEBI registered fee-only financial planner before that. Paying for financial help is commonsense. However, it is also commonsense that we should be the only one paying the adviser and not the AMC by taking a piece from our investment gains.
The MF Utility is now operational and once invest in direct funds of 25 amcs in one portal. Soon we will have a slew of robo-advisory direct mutual fund portals available.
All I can say is,
Free Apps for your Android PhoneInstall Financial Freedom App! (Google Play Store)
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Find out if you have enough to say "FU" to your employer (Google Play Store)