Direct Mutual Funds have become popular among investors in recent years. But what are Direct Mutual Funds? How are they different from Regular Mutual Funds? In this video, we answer all your questions related to Direct Mutual Funds.
Topics covered in this video:
00:00 Introduction
00:23 Cost of Investing in Mutual Funds
01:30 Difference between regular plans and direct plans of mutual fund
02:10 How Direct mutual fund plans make a big difference in your final investment returns
👉 Costs Impact Returns
When you invest in a mutual fund scheme, the fund house charges you an annual fee for managing your money. This annual fee is known as the expense ratio.
The mutual fund expense ratio covers all costs and expenses of the fund house including management fees and operating expenses of the fund such as printing scheme information documents, infrastructure costs, couriering statements, marketing and distribution costs.
The expense ratio is a small part of your total investment value. The mutual fund company levies this expense ratio on your daily investment value and collects fees from it. This means that a mutual fund scheme or plan with a lower expense ratio will always be beneficial to an investor as the asset management company will take less money from the returns generated.
👉 Difference between direct and regular plans of mutual funds
In regular plans, you invest through an intermediary like a financial advisor or your bank relationship manager. Mutual Fund companies have to pay agents commission till the time you stay invested. This becomes an additional cost for fund houses and therefore they charge a higher expense ratio and you get lower returns.
On the other hand, you can purchase direct plans directly from the mutual fund company. Since there is no broker involved, no commission needs to be paid, and that means lower expense ratio and higher returns. ETMONEY is a platform that promotes direct plans and does not make any commission from mutual fund companies
Although the difference between the expense ratio of Direct and Regular Plans is around 1%, this can make a big difference in your total corpus. Let's understand this with an example.
Akash and Deepak invested ₹7200 monthly SIP in an equity scheme. Now Akash chose a regular plan and Deepak chose a direct plan for the same mutual fund scheme.
Now we learnt earlier that since the cost of direct plans is less than regular plans, the extra saving goes back into the fund returns. Thus assuming a return of 12% per annum, in 25 years, Deepak’s total investment value will be 1.45 crore and Akash’s investment value will be just 1.20 crore. That's a 25 lakh difference. Why?
It's because Akash invested in a regular plan and because of this, the mutual fund had to deduct a higher expenses ratio in order to pay his agent some commission. Over time, that extra 1% kept on accumulating and compounding to become as high as 25 lakhs. In other words, over 25 years, Akash paid a commission of 25 lakhs to his agent or bank.
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