If you consider the Kotak Standard Multicap fund, the TER for its regular plan is 1.75% and that for its direct plan is 0.87%. (Photo: iStock)
If you consider the Kotak Standard Multicap fund, the TER for its regular plan is 1.75% and that for its direct plan is 0.87%. (Photo: iStock)

Returns from direct MF plans higher than regular variants due to lower expense ratio

  • A set of funds would give you diversity in your holdings in the form of fund houses, fund management styles, fund categories, and more
  • All mutual funds carry a fund management expense that is charged to the investor for managing the fund

I want to invest for my retirement corpus. As per Mint50, I have selected two funds—Principal Emerging Bluechip fund and Principal Multi Cap Growth fund. I want to invest in one of the above funds for 10 years. Kindly guide me as to which fund should I select.

—Sanjay Gargish

When investing for a long-term goal such as retirement, it would be a good idea to have a portfolio of funds rather than just a single fund. A set of funds would give you diversity in your holdings in the form of fund houses, fund management styles, fund categories, and more.

However, if you want only one fund between the two funds, I would suggest that you go with the multi-cap fund. This fund would give you a broader coverage of the market and one where the fund manager has the flexibility to go with the most profitable sectors and segments without constraints. If you choose to add a second or third fund to your portfolio (along with this multi-cap fund), you can go with Mirae Asset Emerging Bluechip fund and Franklin India Smaller Companies fund. If you are going with two funds, go 50-50 between the Principal and the Mirae funds. If you are adding a third fund, allocate 20% to the smaller companies fund and 40% each to the two other funds.

I have been investing in mutual funds for the last 15 years but I have some queries. Do direct plans of mutual funds give better returns than regular plans?

—Mihir Vasavada

All mutual funds carry a fund management expense that is charged to the investor for managing the fund. This expense usually called TER or total expense ratio varies between the direct plan variant of a mutual fund and the regular plan variant of the same fund. The TER for direct plans is necessarily lower than that of regular plans. Hence, by regulation and by definition, direct plan investors do pay less fund management expense compared to the regular plan investors, and consequently, the returns from direct plan investments are higher. This difference is typically higher for equity funds compared to debt funds, since the TER for equity funds is usually higher.

For example, if you consider the Kotak Standard Multicap fund, the TER for its regular plan is 1.75% and that for its direct plan is 0.87%. A 1 lakh investment in the two variants five years ago would have a value of 1.74 lakh (11.71% compounded annual growth rate or CAGR) for the direct plan and 1.65 lakh (10.53% CAGR) for the regular plan. Similarly, if you take the popular debt fund Franklin Templeton Ultra Short Bond fund, there would still be a difference between the two variants, although at a smaller magnitude. The five-year return for the direct variant is 9.30%, while that of the regular scheme is 9.21%.

Srikanth Meenakshi is co-founder and former chief operating officer, FundsIndia.com. Queries and views at mintmoney@livemint.com

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