Know about the higher returns you make by investing in direct mutual funds?
I hear that Direct Mutual Fund give higher returns, can you explain?
Yes, it is true that investing in direct mutual funds leads to higher returns. Lets understand that. While investing in mutual funds there are two options available: Regular and Direct. You can invest in direct plans on online platforms like Paytm Money or directly with the asset management companies (AMC) websites, while you can buy regular plans through any distributor or bank. In both these options, everything as far as investing matters is same, except that Direct mode has lesser expense ratio compared to Regular mode of the same scheme and hence the difference results in higher returns in direct mutual funds.
Tell me about expense ratio
The money that you invest in a mutual fund scheme is managed by professional fund managers. They spend time, energy and resources to identify suitable investments that would earn potentially good returns for you. There are also other operating costs and expenses involved in running the fund. Basically, expense ratio of a mutual fund is the money that the AMC or mutual fund company takes from its investors to pay for this professional service or simply put for running and managing all its operations.
What has Expense Ratio got to do with Regular or Direct option?
Expense Ratio can become the Hero of this story, but it depends on what you do!
When you invest in the Direct plan of a mutual fund scheme, your expense ratio is the cost of professional service provided. On the other hand, when you invest in the Regular plan through a distributor, you pay a higher Expense Ratio. The extra expense that you pay goes to the distributor as commission. Simply put,
Expense Ratio of Regular option = Expense Ratio of Direct option + Distributor commission
PS: And they don’t tell you about these hidden commissions!
Tell me how much more can I get in returns from direct plan?
The returns that you see on your mutual fund investments are net of expenses i.e. after deducting the expense ratio. The returns for both plans of a scheme is same before expense ratio. But due to higher expense ratio in regular plans, your net returns are lower. Let us see how a higher expense affects your returns with an example.
Note: Returns are assumed to be for 1 year period. Expense ratio is annualized. This is an illustrative example.
Let’s take an illustrative example below to compare the returns between Direct Plans on Paytm Money & regular plans offered elsewhere.
Should I really bother, is the difference big enough?
That is a valid question. But remember, investing is like a marathon not a sprint. It is a long term commitment. It looks like a small difference in the short term, but will surely end up making a very large difference over the long term.
Paytm Money has now made it very easy for you to
- compare the difference between expense ratio of all schemes &
- view expected higher returns with direct funds over time-span of 5–20 years
Know all about the impact in returns between direct vs regular plans on our latest webpage here.
This will help you know how much more wealth you can create by investing INR 10 lacs through Direct plan over different time periods!
We are sure that you would not have imagined so much of extra earnings over 5 years, 10 years or 20 years. The arguably small cost savings each year make such a big difference to your wealth eventually. After all “It is every drop that makes an ocean”.
So ‘Direct’ is the way ahead in your wealth creation journey and Paytm Money partners you in your journey by offering Direct option of mutual funds along with various SIP options as well.
For users who always wanted to invest in Mutual Funds but don’t know how to get started, we suggest them to explore Investment Packs on Paytm Money app which are designed to take care of your investment needs based on your risk profile & make this investment choice simpler for you!
So if you are investing, invest smart in Direct Mutual Funds only via Paytm Money.