How much money you save in direct vs regular mutual funds

Zerodha Coin - Direct MF
1

How much money you save in direct vs regular mutual funds in the long run??

How much money can i save investing directly from coin vs through a fund manager?

2

Depends on the expense ratio and the duration that you hold, but in general, for the long term (actually, for any term …) it makes no sense to buy regular mutual funds if you know what funds you are going to buy.

Here are a couple of examples that may help make this clear. Suppose you invested Rs.1L in the NFOs of two different funds, Parag Parikh Flexi Cap and PGIM India Flexi Cap (I chose the two funds which have performed the best over the last five years in the Flexi Cap space, as per VRO.). The PP fund was launched on 28-May-2013, and the PGIM fund on 04-Mar-2015 (all this data is from VRO).

Each fund launched with an NAV of Rs.10, so you got 10,000 units of each fund. Suppose you bought the direct and regular versions of these funds, and never sold them. Then your returns on 03-Feb-2022 are as follows:

  • PPFCF:
    • Direct version:
      • NAV as on 03-Feb-22: Rs.54.3661
      • Total value: Rs.543661
    • Regular version:
      • NAV as on 03-Feb-22: Rs.51.2965
      • Total value: Rs.512965
    • Difference: Rs.30696
  • PGIMFCF:
    • Direct version:
      • NAV as on 03-Feb-22: Rs.29.8600
      • Total value: Rs.298600
    • Regular version:
      • NAV as on 03-Feb-22: Rs.26.8500
      • Total value: Rs.268500
    • Difference: Rs.30100

In each case you end up paying around 30% of your original investment as fees for the regular version, over 10 years and 7 years, respectively. The difference is due to the difference in their expense ratios; the PGIM fund has a higher TER now, I guess it has been like that over the years as well.

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3

Regular means you are paying the extra fees(commission) to the platform or Agent when buying the mutual fund . It ranges from .7 to 1.5 % of the money deployed based upon the scheme. So if there is any financial consultant or agent sold you any scheme that extra money goes to his pocket.

Direct means you are buying the scheme by your own knowledge and there is no middle party or platform involved.

In short you will save .7 to 1.5 % per annul of the money deployed based upon the scheme.

4

Regular means you are paying the extra fees(commission) to the platform or Agent when buying the mutual fund

(Emphasis mine.)

Alas, this is not (nearly!) the full picture. Regular means that you pay the extra fees (commission) to the platform or agent every single working day that you hold the units, for ever and forever (till you sell them!). This is what eats into the profits.

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5

Yes , fully agree. This was how Mutual fund was sold in decades because there was no financial knowledge and there were So many agents selling these schemes with no skin in the game. So mostly Schemes with higher Expense ratios were sold to the customer and there was no platform selling direct funds. Its was really very tough to purchase Direct funds till 4-5 years back. Now with Financial knowledge and more platforms selling direct funds, its really doesn’t make any sense to buy ‘Regular’ schemes.

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6

There are also differences in expense ratios between direct and regular plans. This is deducted everyday when the AMC declares NAV.
The expense ratio may seem tiny at first but if you compound it over time it has a huge impact, because usually we tend to invest for a long period of time.

Give this thread a read, if you haven’t already.