Direct mutual fund plans have lower expense ratios

The portfolio of the direct plan of a scheme (which is the same as that of the regular plan of the same scheme) goes up faster in value than the regular plan


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The net asset value (NAV) of a regular dividend plan that I invest in is lesser that of a direct dividend plan. Why?

—Prasenjit Pal

To understand why the NAV of a direct mutual fund (MF) plan is higher than that of the corresponding regular plan, we need to understand both the concept of NAV as well as the difference between the two plans. NAV of a fund is the total value of all the assets held by it (in its portfolio) divided by the number of outstanding units (held by investors in the MF). This number, as you can see, is proportional to the value of the assets held by the fund. So, as the value of the fund’s portfolio grows, NAV grows (assuming the number of units remains same).

The difference between direct plans and regular plans is that the expense ratio is lesser with direct plans for the same schemes. This means more money stays in the fund when compared to the regular plan of the same scheme. So, the portfolio of the direct plan of a scheme (which is the same as that of the regular plan of the same scheme) goes up faster in value than the regular plan. Due to this, the per-unit NAV also goes up faster for the direct plan of a scheme when compared to that of the regular plan.

Please note that this does not mean that the direct plan is less desirable than the regular plan. In fact, when it comes to growing your investment, because of this same reason, the direct plan of a scheme will grow faster because, as noted earlier, the value of its assets grows faster due to lower expenses.

I have a surplus cash of Rs.4 lakh and want to invest this money in MFs for around 10-15 years. I already have systematic investment plans (SIPs) in two large-cap schemes and one multi-cap fund. Should I invest this money as a lump sum or as SIPs? What should be my investment strategy?

—Pankaj Kumar

There are three questions that you need to answer: how to invest, where to invest, and in how many funds.

About how to invest, you should consider how sensitive you are to market volatility. If you want to play it safe, you could spread out your investments over 12 SIP instalments (or systematic transfer plan instalments). Else, you could simply deploy the money in the chosen funds over 3-4 months.

Either way, doing a single one-time investment of the money might not be a good idea.

About where to invest, assuming the current funds you hold (two large-cap and one multi-cap) are good funds (from the Mint 50 list: http://bit.ly/1TGY5e4 ), then you can retain them and add a couple of more funds to your portfolio. You may add a mid-cap fund such as BNP Paribas Midcap fund and a debt fund such as HDFC Short-Term fund to your portfolio. This would bring your overall basket size to five funds, which is an ideal, manageable size for such a long-term investment portfolio.

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