Indian investors are often advised that discipline and time are the most powerful drivers of wealth creation—stay invested, ignore short-term volatility, and let compounding work its magic. While this advice is sound, a new study suggests that for many mutual fund investors, a silent structural cost is steadily undermining these benefits.
A study by1 Finance Researchreveals that over a10-year holding period, more than80% of equity mutual fund schemesleave investors inregular plans at least 25% worse offthan those invested in thedirect plansof the same schemes. In nearly20% of schemes, the wealth gap exceeds50%, driven entirely by higher compounding expenses rather than differences in market performance or fund selection.
The distinction between regular and direct plans remains poorly understood. Both invest in identical portfolios, are managed by the same fund managers, and face the same market cycles. The key difference lies in costs.
Regular plans include distributor commissions within their total expense ratio, while direct plans exclude these charges, resulting in lower annual costs. Though the difference may appear marginal on paper, even a small annual gap compounds significantly over time.
To isolate this effect, the study analysed AMFI NAV data for Direct Growth and Regular Growth equity schemes across categories, assuming a uniform investment of Rs 100 from the same start date. By eliminating all variables except cost, the results clearly show that the wealth gap widens steadily—and exponentially—over time.
Over shorter periods, the impact may seem manageable. Over five years,53% of schemessaw regular plan investors lose15% or moreof their potential wealth compared with direct plans. Extend the horizon to a decade, and this underperformance deepens into significant erosion.
Ironically, regular plan investors tend to stay invested longer. As of March 2024,21.2%of regular plan investments were held for over five years, compared with7.7%for direct plans. While longer holding periods should enhance compounding, higher embedded costs steadily dilute those gains.
AsRajani Tandale, Senior Vice President, Mutual Fund at 1 Finance, points out, this erosion is structural—not episodic or market-driven.
Despite regulatory reforms and improved disclosures, regular plans continue to dominate assets. Legacy distribution models, investor inertia, and limited understanding of long-term cost impact keep the structure intact.
Many investors closely track returns but rarely convert expense ratios into long-term rupee losses. A 1% annual cost difference may seem trivial, but over a decade, it can mean sacrificing a quarter or more of potential wealth.
The study delivers a clear and uncomfortable lesson: choosing the right plan is as important as selecting the right fund. While markets fluctuate and fund performance varies, expense ratios work against investors every single year.
Ignore them, and compounding shifts from a powerful ally into a slow, persistent leak.
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