Direct vs Regular Mutual Funds: How a 1.25 per cent difference can cost you crores

Mutual Fund Direct vs Regular SIP calculation: Know how a small change in your mutual fund returns can make a big difference.

Calculating Mutual Fund Direct vs. Regular SIP: How big of a difference can a 1.25 per cent change in a mutual fund scheme's annualised returns make? In the short term, a 1.25 per cent difference in annualised returns may not seem like much, but in the long term, it might amount to lakhs or even crores of rupees.

Let's look at an example of a top-performing mutual fund scheme: Nippon India Small Cap Fund.

In the last 10 years, the direct plan of this scheme has given 31.46 per cent annualised returns while the regular plan has given 30.21 per cent returns, as per data on the website of the Association of Mutual Funds in India (AMFI) tracked till August 31, 2023. The difference between the annualised returns of direct and regular plans of this scheme is 1.25 per cent.

Now, suppose an investor started a Rs 10,000 monthly SIP in this scheme 10 years back. The SIP calculator shows that investing this amount per month in the direct plan of this scheme would have resulted in a total corpus of around Rs 83.5 lakh by 31st August 2023.

However, investing the same amount per month in the regular plan would have resulted in a corpus of approx Rs 76.4 lakh, which is around 7 lakh less than the corpus of the direct plan.

The difference between direct and regular plan returns grows larger with time.

For example, let’s assume that this fund gives similar returns for 20 years and the investor continues his SIP for this duration.

At 31.46 per cent annualised returns from the direct plan, the investor would be able to accumulate about Rs 19.5 crore in 20 years with a monthly SIP of Rs 10,000. However, the regular plan would help create a corpus of just around Rs 15.9 crore in 10 years at 30.21 per cent annualised returns, which is Rs 3.6 crore less than the direct plan.

Conclusion:

A small difference in the annualised returns of a mutual fund scheme can make a big difference in the long term. This is because the returns are compounded over time. The example given in the article shows that it is important to invest in the direct plan of a mutual fund scheme to maximise your returns. The direct plan does not have any commission or load charges, which is why it offers higher returns.

If you are investing in mutual funds, it is important to do your research and choose the right scheme for your investment goals. You should also compare the direct and regular plans of a scheme before investing.