Don’t let your investment broker fool you!

Comparison of NAV movement between Direct Plans and Regular Plans

Direct Plans are better for you

 

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.

REGULAR DIRECT  
Initial NAV 100 100
No of Units purchased 1,000 1,000
Initial Investment 100,000 100,000
Add: Returns on the investment 12,000 12,000
Less: Fund Expenses 1,000 1,000
Less: Commissions 1,500  
1,09,500 1,11,000
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.

REGULAR DIRECT  
Initial NAV 109.5 111.0
No of Units purchased 913.24 900.90
Initial Investment 100,000 100,000
Add: Returns on the investment 210,585 210,585
Less: Fund Expenses 29,440 29,440
Less: Commissions 38,640
2,42,505 281,545
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.

Investing Simplified

Not investing yet? Finding it hard to make time to plan your investments? Sign up on kuvera.in today and experience goal planning and investing to your fingertips.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *