DT Personal Finance: How to plan investments for ‘mutually’ beneficial returns

CHENNAI: When you invest in mutual funds, then you have the option to invest via direct plans or via the regular ones. The difference is when you invest in ‘direct’ plans, then that investor invests with the AMC directly without going through MF distributors/agents and hence, avoid paying commissions unnecessarily.

As a result, direct plans have lower expenses (due to no commission being paid to distributors) and hence, higher NAVs. Let’s take an example. Let’s pick a popular flexicap fund (Parag Parikh Flexicap Fund) to see what the difference in NAV is and how it matters when you invest for years.

Now here is the difference in NAVs of direct & regular plan of this fund at the time of writing this article:

• Regular plan – Rs 66.13

• Direct plan – Rs 71.31

Please note since direct plans have lower expenses (and higher expenses negatively impact NAV growth), the NAV of a direct plan of a given fund will always be higher than that of its regular plan. And this difference will keep on growing each day, as the direct plans always give higher return than regular plans due to lower expenses, year after year.

Let’s now see how this NAV difference impacts the future wealth that you can accumulate if you invest in either of these plans.

Suppose you started Rs 10,000 SIP in both regular and direct plans about 10 years back, ie on January 1, 2014. So, till today, you would have invested close to Rs 12.1 lakh in either of the plans.

But the current value of your investments will vary due to difference in NAVs of direct and regular plans. And what would that be?

• Value of investment in regular plan – Rs 33.82 lakh

• Value of investment in direct plan – Rs 35.57 lakh

As you can see, the difference between the two is that amount accumulated in regular plans is lower by almost 5-6%. And this is after 10 years. Imagine how big this difference will be if you are investing for goals like retirement etc., where your investment horizon is even longer (like say 20-25 years).

So, if you invest in mutual funds via regular plans, then do think about how much portion of money you’re losing to higher expense due to commissions being paid each year.

And if you invest a substantial part of your portfolio in mutual funds, then you should be careful about whether you are investing via regular plans or direct plans. Don’t get me wrong. I am not saying regular plans are wrong. But if you generally pick funds on your own or you are taking services of fee-only investment advisor, then always invest via direct plans which give more returns than regular plans due to lower expenses.

Note – The fund above is chosen only for illustration. Therefore, do not consider it as investment advice of any kind.

—(Dev Ashish is a SEBI-registered investment advisor and founder of

Stableinvestor.com, who provides fee-only investment advisory services)