Understand the impact of expense ratios on the net asset values of mutual funds
21-Feb-2023 •Chirag Madia
Is the NAV of any mutual fund in regular plan any different than in direct plan and if so, the number of units allotted under these two options would be different for any fixed amount? - Sham Mor
Yes, regular and direct plans of mutual funds have different NAVs (net asset values).
Here's the reason why.
The NAV of a mutual fund mainly depends on two factors - the fund's underlying portfolio and its expense ratio. It can be derived with the formula:
So a fund with a different portfolio or a different expense ratio will have a different NAV.
While the underlying portfolio of regular and direct plans of a mutual fund is the same, the expense ratio is different, which affects the NAV. Regular plans have a higher expense ratio because they include distributor commissions. On the other hand, direct plans have a lower expense ratio because there is no distributor commission. As a result, the NAV of regular plans is lower than direct plans due to the higher expense ratio of regular plans.
The number of units that an investor would receive by investing a fixed sum of money is a mathematical function between the amount invested and the NAV of the fund. The NAV represents the value at which one unit is available. Hence, the number of units allocated to the investor will be the amount of the investment divided by the NAV of that particular fund. For instance, if the NAV of the direct plan is Rs 11, a Rs 10,000 investment will result in 909.09 units. On the other hand, if the NAV of the regular plan (of the same scheme) is Rs 10, the investor will receive 1,000 units. Therefore, as we can see, the number of units allotted are different.