chat GTP analysis on mutual fund regular and direct investment. with some references
mutual funds buying via agent i.e. regular , how do they calucalate expenses ,is it daily, monthly, yearly? example of investing 6lacks regular and direct, after one year withdrwal, after 3 years withdrawal compare results both regular and direct( show in table)?
ChatGPT said
When investing in mutual funds, expenses are primarily calculated as a percentage of the total assets managed by the fund. This percentage is known as the Expense Ratio. The expense ratio is deducted from the fund's Net Asset Value (NAV) daily, regardless of whether the investment is direct or regular. Here's a breakdown:
- Direct Plan: The expense ratio is lower since no commission is paid to agents.
- Regular Plan: The expense ratio is higher as it includes the commission paid to agents.
Key Assumptions
- Investment: ₹6,00,000 (one-time lump sum)
- Expense Ratio (Direct Plan): 0.5% annually
- Expense Ratio (Regular Plan): 1.5% annually
- Annual return of the fund: 10%
- Duration: 1 year and 3 years
- No exit load for simplicity.
Step-by-Step Calculation
Calculate Gross Returns:
- Gross Value after 1 year = ₹6,00,000 × (1 + 10%) = ₹6,60,000
- Gross Value after 3 years = ₹6,00,000 × (1 + 10%)³ ≈ ₹7,95,300
Deduct Expense Ratio Daily:
- Daily deduction is calculated on NAV.
For simplicity, we'll approximate annual deductions:
- Direct Plan: ₹6,00,000 × 0.5% = ₹3,000 per year
- Regular Plan: ₹6,00,000 × 1.5% = ₹9,000 per year
Table of Results
| Details | Direct Plan (₹) | Regular Plan (₹) | Difference (₹) |
|---|---|---|---|
| After 1 Year | |||
| Gross Value | 6,60,000 | 6,60,000 | 0 |
| Expenses Deducted | 3,000 | 9,000 | 6,000 |
| Final Value | 6,57,000 | 6,51,000 | 6,000 |
| After 3 Years | |||
| Gross Value | 7,95,300 | 7,95,300 | 0 |
| Total Expenses Deducted | 9,000 | 27,000 | 18,000 |
| Final Value | 7,86,300 | 7,68,300 | 18,000 |
Observations:
After 1 year:
- Direct Plan gives ₹6,57,000, while Regular Plan gives ₹6,51,000.
- You save ₹6,000 in expenses with a Direct Plan.
After 3 years:
- Direct Plan gives ₹7,86,300, while Regular Plan gives ₹7,68,300.
- You save ₹18,000 in expenses with a Direct Plan.
Key Takeaways:
- The longer you stay invested, the greater the impact of the expense ratio.
- Direct plans are more cost-effective, especially for long-term investments.