My last attempt to convince you to switch to Direct Mutual Fund

I probably should have discussed this in the last post itself, but don’t know why (and how I missed it). While we discussed Direct and Regular plans, I should have perhaps given you an indication of how much one can save by opting for a direct plan. Also, this is my last attempt to convince you to switch to direct MF investment as opposed to regular MFou can do this little experiment yourself.

Pick any Mutual fund of your choice. I’ve picked IDFC Core Equity Fund, Growth. Arbitrarily assuming a starting date and a SIP amount, I’ve picked Rs.10,000/- as the monthly SIP amount, starting from 1st Jan 2014. I further assumed that the SIP is continued over five years, i.e. till 1st Jan 2020. I’ve used a standard SIP calculator (I’ve used the one on Moneycontrol) to see the performance of the SIP in this fund. Here is the result –

There are a couple of things you will notice here –

1. The CAGR (or XIRR to be particular) is 8.84%

2. The total amount invested is Rs.7,30,000/- across 73 months.

3. The total number of units acquired is 20,772.43

4. The value of the investment is 73 months of regular investment is Rs.9,52,000/-?

This is a reasonably standard SIP performance. Now, repeat the same activity with the same fund, but in the direct option, i.e. IDFC Core Equity Fund, Direct, Growth.?

Here is how the performance looks like –

Contract the performance of the direct option with the regular option. I’ve tabulated this for you so that it’s easy for you to compare –

In the direct fund, you would have accumulated 19,982 units, slightly lesser than regular funds. But do recall from the previous chapter, the value of units in direct funds is always much higher compared to the regular fund.

As you can see, the investment value in direct is Rs.9,99,527/- versus the value of Rs.9,52,000/- in the regular fund.

The difference is Rs.47,527/- or about 6.51% when compared to the initial investment amount. Where do you think this money is going?

Well, the money is going to the distributor for having advised you to start a 10,000/- SIP five years ago.?

Now obviously in the direct fund, the distributor does not make this commission. Hence the returns are higher, this is quite evident when you look at the XIRR as well – 10.47% Direct Fund XIRR versus Regular plan’s 8.84%

Which implies, that every year you end up paying 1.63% of your investment value as commissions

Do yourself a favour, and please switch to direct funds