Before investing in a fund, its very crucial to check the fund scheme or plan. Here we are going to see what is the cost of choosing the wrong fund scheme and how to avoid it.
Types of mutual fund scheme
Every fund has two category : Regular & direct.
We are going to see an example of fund return in a regular scheme & the direct scheme began invested on the same day on the fund.
For this case I have taken Axis focused 25 equity fund as an example.
We are going to invest Rs 10000 INR from 1st Oct 2013 (SIP start date)in this scheme. We are going to end the investing on 21st Jan 2022 (SIP end date). The invested amount is Rs 10 lakhs INR. Lets see the fund return in below images.
Here the date & investment value is highlighted on the image. Now lets take a look at another image;
Must read: Why mutual fund is great for new investors?
If you have noticed, though the date of investment and the invested amount is the same for both schemes, the direct scheme return is 1.4 % more than the regular ones. Hence the difference of INR 130491 in profit !!!
Why this variations??? 1.3 lacs is not a small amount to forfeit. Now lets go through the ratio called expense ratio which causes such difference in returns.
Expense ratio is charged by the fund house from investors pocket to cover the operational & managerial expenses. If you have invested 1 lakh in a fund, its expense ratio is 1 % . You will be charged 1000 INR.
More the expense ratio , the more charges incurred by the investors. Less the expense ratio, the less charges for investors. Lets take a look at the expense ratio of regular & direct scheme of Axis focused Fund plan( Not a recommendation to invest, solely for education purpose)
The regular scheme has an expense ratio of 1.77 %.
The direct scheme expense ratio is 0.59 %.
Difference in expense ratio is 1.18. Due to this factor, regular scheme profit is INR 1.3 lacs lesser than direct scheme.
Why expense ratio is high in regular scheme?
When you buy a fund through a distributor, the fund house has to pay commission to brokerage. These charges are covered in expense ratio, less return for investors.
When you buy a fund through mutual fund company, you are buying directly (No middlemen). So less expense ratio , more return for investors.
If you want to know where to buy direct scheme avoid all the multiple logins & passwords? You can open an account with discount brokerage accounts like zerodha. You can access to all funds houses through their mutual fund app coin with zero commission charges. You can use the link below to open an account with zerodha :-