Category: Money

Direct Mutual Fund Vs. Regular Mutual Fund & their expense ratios

Mutual funds are available with two plans: Direct and Regular.

Regular Plan: When you buy a mutual fund through a mutual fund broker, distributor or advisor, it is called a regular plan. In case of a regular fund, the fund house pays commission to the middleman. The MF company will add this commission to the expense ratio. This is why regular funds are slightly more expensive than direct funds. The commission is deducted every trading day.

Direct Plan: In the direct mutual funds, there will be no role for intermediaries commonly known as brokers. Investors are free from commission or distribution fees, which brings down the expense ratio.

Expense Ratio

The expense ratio of a mutual fund is the total percentage of fund assets used for administrative, management, advertising, and all other costs. An expense ratio of 1% per annum means that each year 1% of the fund’s total assets will be used to cover costs.

The expense ratio of direct plans is significantly lower than regular plans. And investors should always take this into account.

Illustrations to help you understand expense ratio:

1.

Suppose there are 200 trading days in an year & MF’s expense ratio is 2.5%. So expense ratio per day becomes 2.5/200 = 0.0125%. Suppose on any trading day, the mutual fund has gained overall 0.30%. You NAV on that day will increase by 0.30–0.0125 = 0.2875%. Similarly, if the mutual fund decreases by 0.30%, your NAV will decrease by 0.3125%. Per day, 0.0125% seems a very small number, but in the long run, it becomes substantial.

2.

Aditya Birla Sun Life Tax Relief 96 Regular Plan has delivered 19.60% CAGR in five years, with an expense ratio of 1.92%. And the direct plan of the same fund has delivered 20.64% CAGR, with an expense ratio of 1.07%. (As of writing this post.)

So the direct plan has a 0.85% less expense ratio.

Suppose, you invested 10 Lakh in this fund for five years. Then at the end of five years, the value of your fund might have been:

Direct Plan: ₹ 25,55,386

Regular Plan: ₹ 24,47,123

So, there is a difference of ₹ 1,08,263. You earn this much less by investing in the regular plan.

So buying a direct plan can reduce operating expenses of the fund. And it can add more returns to your bucket. Also keep in mind that expense ratio also compounds with time.

We are often raised to believe that, Money isn’t everything. Money can’t buy Happiness. And in our hapless search for Happiness we end up being miserable by ignoring what money can buy for us.

Yes, Money can buy happiness but it entirely depends on what you spend it on.

Very first question to ask yourself is What happiness means to you?

“If you have a garden and a library, you have everything you need.”

― Marcus Tullius Cicero

Good Books? Money can buy Good Books for you, least an access to good library.

A beautiful Garden? Money can buy best in quality seeds, fertilizers, land, tools that constitute a beautiful garden.

Meeting new people, visiting new places? Money can buy tickets for you to travel wherever you want.

Good Health? Money can buy food, access to health instruments, treatment for your diseases and access to healthcare.

Helping Others? What else can be greatest utilization of the money than helping others. Money can buy yourself more time, resources, energy to help others.

Happiness is mostly attributed to things like Garden, Health, Good Books, Good social circle. And the most important fact that connects everything together is often ignored that is Money.

I quoted Cicero’s quote earlier, however we should not ignore that he was born in 106 BC, a time when mostly money was a tool of riches and powerful. Today we live in fairer, democratic, freer world and we have access to ethical ways of garnering money than ever was possible.

So let’s respect the value of money in our life and lets not waste it on petty things, garner it for our own Upliftment by choosing to spend our money wisely.

An entire generation pumping gas, waiting tables, slaves with white collars, advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need. We’re the middle children of the history man, no purpose or place, we have no Great war, no Great depression, our great war is a spiritual war, our great depression is our lives, we’ve been all raised by television to believe that one day we’d all be millionaires and movie gods and rock stars, but we won’t and we’re slowly learning that fact. and we’re very very pissed off.” 
― Chuck Palahniuk, Fight Club

Our society is on a perilous course. A dangerous crisis is slowly emerging. Like a cancer it is spreading slowly through society. Unknowingly it is eroding our most cherished values. I’m talking about rampant consumerism that is spreading like a infectious disease and we are helpless.

According to one recent study, that by age 16 the typical American will have seen almost six million ads. That in other language means more than one ad per waking minute. And in other countries too situation is equally depressing. Such unstoppable bombardment of advertisements is creating a very powerful effect on our culture. Watching mere advertisements may not seem like a problem, however the real problem arises when advertising convinces us that consumption is the real answer to our life’s challenges. We madly act as if all our problems can be solved by buying what is shown in those advertisements. To get in shape, we purchase an exercise video by that famous model. To lead a healthy lifestyle, we heed the mystical teachings of self-anointed beard sporting guru. Every year, some new model of that fancy smartphone comes to market and we convince ourselves to spend a big portion of our monthly salary to buy it.

With every purchase we make, we should realize that advertising is a fertile land of lies and unfulfilled promises. But we do never learn from our own mistakes just to repeat them. Instead, we keep on consuming more and more. With each new purchase we invent a more imaginative excuse for why the previous purchase failed to solve our problems.

You buy furniture. You tell yourself, this is the last sofa I will ever need in my life. Buy the sofa, then for a couple years you’re satisfied that no matter what goes wrong, at least you’ve got your sofa issue handled. Then the right set of dishes. Then the perfect bed. The drapes. The rug. Then you’re trapped in your lovely nest, and the things you used to own, now they own you.
― Chuck Palahniuk, Fight Club

So, why should we be worried about it? Consumerism directly results into self-inflicted poverty. And we don’t even realize it. Actually television constantly bombards us with completely false sense of wealthiness. It provokes us to buy more to look like rich, indirectly emptying our pockets and making us poor and miserable with every purchase we make.

Finance expert often talk about saving and investment. How these two things are not same things and how should we plan them differently. More about it, later. However, we are completely ignorant of the fact that, before saving/investing our money, we need to protect it. Yes, protect it! We need to protect it from our own irrationality, conformity. Our irrational spending habits, instant gratification methods are making us spend more. And we urgently need to save us from ourselves.

How? Stay tuned.