I understand regular has more TER than direct MF.
Also I understand that NAV is declared after deducting TER
Hence regular MF will have lower NAVs than Direct MFs
There are lot of videos which mentions Regular leads to less cost savings than direct MF
However, which I never understand is when I buy regular MF for lets say 1000 Rupees, I buy it at a cheaper price hence more units… as compared to direct MF
When I sell these units after some time, regular MFs though will offer me lesser NAV but I will have more units to sell… so how does regular leads to less cost savings (as number of units also increase in regular)
Suppose you invest 1000 Rupees in a regular mutual fund with a NAV of 10 Rupees per unit, which means you’ll get 100 units (1000/10 = 100). However, let’s assume the expense ratio of this regular mutual fund is 2% per year.
After a year, if the NAV of the fund has grown to 11 Rupees per unit, the value of your investment would be 1100 Rupees (100 units * 11 Rupees). But when you sell your units, the 2% expense ratio will be deducted from this amount. So, you’ll receive 1078 Rupees (1100 - 22 Rupees).
Now, let’s consider the same investment in a direct mutual fund with a lower expense ratio of 1%. If you invest 1000 Rupees in a direct mutual fund with a NAV of 10 Rupees per unit, you’ll also get 100 units. After a year, if the NAV grows to 11 Rupees per unit, the value of your investment would be 1100 Rupees (100 units * 11 Rupees). Since the expense ratio is only 1%, the deduction would be 11 Rupees (1100 * 0.01). Therefore, you would receive 1089 Rupees (1100 - 11 Rupees).
In this example, even though you initially purchased more units in the regular mutual fund, the higher expense ratio led to a greater reduction in your returns compared to the direct mutual fund with a lower expense ratio. Over time, the compounding effect of lower expenses in direct mutual funds can significantly impact your overall returns and cost savings.
Doubt. Your example is very clear, however, you say, when he sells, the 2% will be deducted. What happens if he does not sell, will the expense of 2% does not get deducted.
I always thought that the NAV would be after deducting the 2% and not before.
or
Is it that you just mentioned"if he sells" just for clarity and for better understanding.
