Mutual fund investing in India has reached unprecedented levels, even as investors pumped in Rs 1.26 trillion into mutual funds in November, driving industry assets under management to an all-time high of Rs 21.8 trillion. Notably, there have a been a few funds which have registered stellar returns in the year, outperforming their respective benchmarks by a considerable margin. SBI Small and Midcap Fund has returned 72% in the year so far, as compared to BSE Smallcap returns of 51%. While this may seem impressive by itself, investors could have earned a higher return just by choosing a different route of investing. 

Prior to January 2013, there was a single plan structure for all investors. Then, the Securities and Exchange Board of India mandated fund houses to offer two type of plans: 1) direct plans for investors who want to directly purchase mutual funds from fund houses rather than going through the distribution channel, and 2) regular plans, or the original format of schemes, sold through the distribution channel involving national distributors, banks, independent financial advisors, aggregators, demat account and digital channels. Hence, while SBI Small and Midcap Fund-Regular Plan has returned 72%% in the year, investors who chose the Direct Plan option have earned 73.5% since January. 

Interestingly, they are the exact same scheme, run by the same fund managers investing in the same stocks and bonds, but with one difference– the Regular Plan cost more. A Regular Plan is one in which the Mutual Fund Company pays the broker/advisor a hidden percentage of commission every quarter. This commission is factored into the higher expense ratio of Regular Plans. Apart from the expense ratio, the schemes will also have a different NAV and returns. “This savings in expense ratio (in case of Direct Plans) is added to the returns of the scheme – and passed on to you, the customer, in the form of a higher Net Asset Value (NAV) each day! And so the NAV of Direct Plans is relatively higher than Regular Plans,” Kunal Bajaj, the CEO of Clearfunds.com observes in a blog post.

Most notably, direct funds have outperformed their regular peers since inception. “The annualised returns have been 23.83% in the direct plan and 22.94% in the regular plan. That doesn’t look like much. However, over the years, an investment of Rs 1 lakh would grow to Rs 2.53 lakh in direct and Rs 2.45 lakh in regular. That’s an extra Rs 8,000 on Rs 1 lakh in four and a half years,” Dhirendra Kumar of Value Research said in a recent article published on the website.