Individuals invest to see their saved money grow. The cost involved in investing and managing the investments plays a big role in determining your returns. Mutual funds have assumed a popular way of investing both for long term and short term goals because mutual funds come across as a low-cost, easy to invest, and professionally managed option for investing. Various investor awareness programs like Mutual Fund Sahi Hai by the Association of Mutual Funds in India have played a big role in promoting the growth of mutual funds in India. Let’s see how a 0% commission mutual fund platform like Fisdom can help you better returns on your mutual fund investment.
While investing in mutual funds expense ratio of mutual funds has an important role in your end returns. Expense ratio is one of the costs involved with investing in mutual funds.
0% Commissions & No fees on Fisdom
Fisdom is an app-based investment platform where you can easily invest in all sorts of mutual funds like Equity Funds, Debt mutual fund, Hybrid Funds or Solution Oriented funds for free on an app available on the Playstore or AppStore. In addition to investing, you can also avail yourself intelligent features like tracking your external portfolio, get smart engine based fund recommendations based on your risk profile, set goals, and plan towards that and much more all at 0% commission and no fees.
How do 0% commissions work on mutual funds?
Mutual funds can be categorised into two types based on their expense ratios.
- Direct plans
- Regular plans.
The basic difference between direct and regular plans is that Direct Plans have 0% commissions paid out to mutual fund distributors/ agents / or any 3rd party. Fisdom only supports Direct Plans of Mutual Funds. Direct plans of mutual funds were introduced by SEBI in 2013.
How do 0% commissions work in Direct Mutual Funds?
The basic difference between direct and regular plans is in the Total Expense Ratio charged to the scheme. Total Expense Ratio (TER) is the percentage of expense charged to the scheme, which is applied to the investor’s portfolio value.
The TER comprises three components:
- Fund management expense
- Administrative expense
- Distributor commission.
Fund management and administrative expense are mandatory expenses charged by the AMC or the fund house to manage that particular mutual fund in accordance with its investment objective. In addition, the AMC also pays the mutual fund distributors/agents some amount of commission in regular plans of mutual funds.
But in direct mutual funds, the Total Expense Ratio does not include distributor commission (and is lowered to that extent) as the investments are made directly with the AMC or the fund house.
How much difference does 0% commissions make to my portfolio’s returns?
A direct plan is for investors who want to invest directly in the mutual fund without routing the investment through a distributor. The plan will have a lower expense ratio since there are no distribution expenses or commissions involved. The plan will have a separate NAV that will reflect the lower expenses. However, the difference between the expense ratio of a regular plan and a direct plan might be a mere 1%-1.5%, but if you are long-term investor even a difference of 1.5% creates a huge difference over a period.
Let’s check out some examples to see what is the difference in the returns between regular and direct mutual fund plans of some selected funds.
Comparison of returns from 0% commission direct mutual fund plan and regular plan of a fund
ICICI Pru Bluechip
ICICI Prudential Bluechip Fund is one of the prime mutual funds offered by ICICI Prudential Mutual Funds. This fund is available in the direct plan and regular plan. The regular plan of this fund was launched in the year 2008 and the direct plan was launched in the year 2013. Let us consider an initial investment of Rs. 5,00,000 under each plan to understand the returns generated and the difference thereby in each plan.
Particulars | Direct plan | Regular plan | Difference |
Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
Period of investment | 5 years | 5 years | – |
Rate of return | 14.46% | 13.55% | 0.91% |
Expense ratio | 1.11% | 1.74% | -0.63% |
Investment value at the end of tenure | Rs.9,82,288 | Rs.9,43,856 | Rs.38,432 |
ABSL Tax relief 96
ABSL Taxrelief Mutual Funds are one of the oldest mutual funds to be launched in the Indian market. The regular plan of the fund was launched in 1996 and the direct plan of the fund was launched in 2013. To know the difference in the returns generated in these plans let us consider the following example.
Particulars | Direct plan | Regular plan | Difference |
Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
Period of investment | 5 years | 5 years | – |
Rate of return | 13.37% | 12.26% | 1.11% |
Expense ratio | 0.99% | 1.81% | -0.82% |
Investment value at the end of tenure | Rs.9,36,399 | Rs.8,91,446 | Rs.44,953 |
Axis Mid Cap
Axis Midcap mutual fund invests dominantly in midcap companies. The regular plan of this fund was launched in the year 2011 and the direct plan was launched in the year 2013. The difference in the returns generated by the two funds can be highlighted in the table below.
Particulars | Direct plan | Regular plan | Difference |
Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
Period of investment | 5 years | 5 years | – |
Rate of return | 21.28% | 19.80% | 1.48% |
Expense Ratio | 0.52% | 1.87% | -1.35% |
Investment value at the end of tenure | Rs.13,11,946 | Rs.12,33,827 | Rs.78,119 |
SBI Small Cap
SBI Smallcap mutual fund invests primarily in small and midcap companies. The regular plan was launched in the year 2009 and the direct plan was launched in 2013. The returns generated over the years by the two funds are detailed below.
Particulars | Direct plan | Regular plan | Difference |
Initial investment | Rs. 5,00,000 | Rs. 5,00,000 | – |
Period of investment | 5 years | 5 years | – |
Rate of return | 23.58% | 22.18% | 1.4% |
Expense Ratio | 0.85% | 1.97% | -1.12% |
Investment value at the end of tenure | Rs.14,41,156 | Rs.13,61,353 | Rs.79,803 |
Conclusion
You can clearly see the difference in returns on a 0% commission and regular plans of the same mutual fund. Here the comparison is carried out only for a period of five years, but on longer tenures like 15-20 years, this small difference can make a significant difference to your returns. Why would you want to lose out on that kind of return and pay commissions to agents and distributors? Start investing on Fisdom with 0% commission direct mutual funds and grow your wealth over a long time.
