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Direct Vs Regular Mutual Fund | How to Make More Money by Investing in Direct Mutual Funds? ETMONEY - YouTube
Channel: ET Money
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What is the difference between Regular and
Direct plans?
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Off-late there has been a lot of buzz around
“Direct Plans” in Mutual Funds.
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But what does it mean?
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And how are they better than Regular Plans?
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Let's begin with the cost involved in Mutual
Fund investments and how they impact your returns.
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When you invest in a Mutual Fund scheme, the fund house charges you an annual fee for managing your money.
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This annual fee, known as the Expense ratio,
covers all the expenses including management
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fees and operating expenses of the fund.
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The expense ratio is a small part of your
total investment value.
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This is annually pre-defined Percentage.
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The Mutual fund company levies this expense
ratio on your daily investment value and collects
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fees from it daily.
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For example, The expense ratio is 2% of any
scheme.
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And 0.05% of the investment value is charged
as fee daily.
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Means if your investment value is ₹ 1000
then you will pay 5 paise daily as a fee.
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Therefore, the Mutual Fund scheme or a plan
with a lower-Expense ratio will always be
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beneficial to an investor, as the Mutual Fund company will take less money from the returns generated.
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With this in mind, let us now come to the
difference between Direct and Regular Plans.
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In Regular Plans, you invest through an intermediary like a financial advisor or your bank relationship manager.
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Mutual Fund companies have to pay agents commission
till the time you stay invested.
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This becomes an additional cost for Mutual
Fund houses and therefore they charge a higher
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expense ratio and you get lower returns.
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On the other hand, you purchase Direct Plans
directly from the Mutual Fund company.
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Since there is no broker involved, no commission
needs to be paid, and that means lower-Expense
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ratio and higher returns.
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Although the difference between the Expense ratio of Direct and Regular Plans is around 1 %,
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this can make a big difference in your
total corpus.
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To understand it better, let’s take an example.
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Just think that Akash and Deepak invested
₹7200 monthly SIP in an equity scheme
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Akash chose Regular plan and Deepak chose
Direct Plan
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If these Mutual funds scheme gives better
returns in 25 years, then after 25 years,
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Deepak’s total investment value will be
Rs.1.45 crore.
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But as per this calculation, Akash’s investment
value will be just Rs.1.20 Crore.
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Around 25 lakh difference.
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Why?
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Because Akash’s invested in Regular plan
and because of this he has to give more expenses
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ratio in order to pay his agent the commission
Do you want to know how this small expense
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ratio became 25 lakhs…come let’s see…This
small expense ratio becomes huge because this
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is an amount levied a percentage of the investment
value
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As the years' pass, the commissions increase,
from the 21st year the commission that the
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agent receives will be more than the monthly
SIP of Akash
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During these 25 years, Deepak’s investment
will be more than Akash.
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And this greater Investment value will keep
giving better returns.
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So, if you can get higher returns by investing in direct plans why settle for less?
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With this, we come to the end of the video.
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If you want to invest in 0% commission Direct
Plans from Top Mutual funds for free, click
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the link below and download the ETMONEY APP!
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