Some brokers tell investors that Direct Plans are more Expensive than Regular Plans and it is not advisable to invest in them. Please do not fall for this argument! Direct Plans are better for you. We will take you through an illustrative Direct Plans NAV calculation and compare it to a Regular Plan.
Say I invest Rs 100,000 in the Regular Plan and Rs 100,000 in the Direct Plan of a new scheme both at an NAV of Rs 100. So I get 1000 units of both the Regular Plan and the Direct Plan of the scheme in my investment account.
Breaking down a simple NAV calculation of Direct Plans vs Regular Plans
Let’s see what happens to each of these Rs 1,00,000 investments. For simplification, we assume all the expenses incurred by the fund are divided into two broad heads Fund Expenses and Commissions. Fund Expenses include items like fund manager salaries, office rent, electricity, marketing costs etc incurred by the Mutual Fund company to collect funds from investors and manage this money. Assume this be around 1% of AUM. Commissions includes anything that gets paid to the distributor for collecting money from investors such as you and I. Assume this be around 1.5% of AUM.
Now let’s look at the NAV calculation for my Regular Plan and Direct Plan investment.
|No of Units purchased||1,000||1,000|
|Add: Returns on the investment||12,000||12,000|
|Less: Fund Expenses||1,000||1,000|
|Divide by Number of Units||1,000||1,000|
|NAV at the end of 1 year||109.5||111.0||1.36%|
As you can see, the NAV of the Direct Plan is higher because they do not have commission expenses. So don’t listen to these false arguments against Direct Plans.
Directs Plans investments get better with time
Let’s look at it in another way. Suppose I invest in the Regular and Direct plan at the end of year one. I’ll be buying the Regular Plan at 109.5 and the Direct Plan at 111.0. Let’s see what happens to both of my investments in 10 years.
|No of Units purchased||913.24||900.90|
|Add: Returns on the investment||210,585||210,585|
|Less: Fund Expenses||29,440||29,440|
|Divide by Number of Units||913.24||900.90|
|NAV at the end of 10 year||265.54||312.07||+17%|
So my investment in the Direct Plan of the scheme will be worth 17% more than the regular plan in just 10 years!
Please see the chart above to see the NAV difference between Direct Plans and Regular Plans over multiple years. The higher NAV over time is not a because Direct Plans are more expensive, it is because over time Direct Plans perform better. Thus, Direct Plans are better for you.
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