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How Regular Plans create more wealth for investors than direct plans ?No. of comments:0 Saurabh Bajaj, MUMBAI, 76474 On 02-Aug-2017

Hello Friends, We keep coming across articles / arguments which say that in long term direct plan investor gains more than regular plan investor. One “self-proclaimed-messiah” of investors asked this question that, if there are 2 investors A and B advised by same advisor, A pays fees and invests in direct plan whereas B invests in regular plan of the same fund. His argument was that direct plan investor will have lower costs and higher wealth in long term. I am sharing a small analysis with you, which can help you to counter this argument of regular and direct. So continuing with the same example, if there are 2 investors A and B advised by same advisor. A invests in Direct and B invests in regular. Further calculations are as below : They have say Rs. 1 Lakh to invest on 1st Aug 2017. Advisor Charges A Rs. 25,000 as flat fee and gives direct plan (These guys are fans of flat fee). Advisor doesn’t charge anything to B and gives regular plan. The Direct plan is available at Rs. 103 and regular at Rs. 100. Investor A gets 728.1553 units on 1st Aug 2017 (after paying Rs. 25,000 as fee, he was left with only Rs. 75,000 to invest) Investor B gets 1000 units on 1st Aug 2017. For 10 years (fairly long term), regular plan grows at 12% p.a. and direct plan grows at 12.75% p.a. After 10 years, the Rs. 1 Lakh with A (Direct investor) is Rs. 2.49 Lakhs and the Rs. 1 Lakh with B (regular investor) is Rs. 3.10 Lakhs. Regular investor beats him by almost 24% as the initial flat fee acts as a deterrant. For a win-win situation for both investor and advisor, a regular plan works much better. This is because, advisor’s revenue increases only with the growth in investor portfolio. Hope this is helpful. (Note : if an RIA charges 0.75%-1% of AUM as fees, then even direct plan is having expense almost similar to regular plan. Thus, it wont make any difference to investor anyways).

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