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Why is the NAV for Direct Mutual Funds Higher than Regular Mutual Funds?

Post Date : April 29, 2025

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute any financial advice.
When exploring mutual fund investments, one of the common questions investors ask is: “Why is the Net Asset Value (NAV) of direct mutual funds higher than that of regular mutual funds?”
To understand this, it’s essential to delve into the concept of expense ratios and how they impact mutual fund returns.

Understanding NAV and Expense Ratio

Net Asset Value (NAV) represents the per-unit market value of a mutual fund. It is calculated as:

NAV = (Total Assets – Total Liabilities) / Number of Outstanding Units

However, this value is calculated after deducting certain expenses – and that’s where the expense ratio comes into play.

The expense ratio is the fee charged by the fund house to manage your investments. It includes fund management fees, administrative costs, distributor commissions (for regular funds), and other operational expenses. The ratio is expressed as a percentage of the fund’s total assets under management (AUM).

Why Direct Funds Have Higher NAVs than Regular Funds?
The key difference between direct mutual funds and regular mutual funds lies in the distribution cost:

• Regular Mutual Funds involve intermediaries or distributors, and therefore, carry a higher expense ratio due to commission payouts.
• Direct Mutual Funds are purchased directly through the fund house or platforms like RMoney, bypassing distributors, and hence, have a lower expense ratio.

Because the NAV is computed after deducting expenses, a higher expense ratio (in regular plans) means more costs are subtracted from the fund’s returns, resulting in a lower NAV. Conversely, direct plans retain more value due to lower costs, leading to a higher NAV.

Example: Expense Ratio Impact on NAV
Let’s say an investor puts ₹5,000 into two variants of the same mutual fund:

• Regular Plan: Expense Ratio = 1.5% → ₹75 annually goes towards fees.
• Direct Plan: Expense Ratio = 0.5% → only ₹25 is deducted annually

Since the direct plan incurs fewer expenses, more money stays invested, and the NAV remains higher over time—even though both plans invest in the same underlying portfolio.

Should You Always Choose Direct Plans?
Direct mutual funds are suitable for investors who:

• Are comfortable researching and managing their own investments?
• Prefer higher returns over time by saving on commissions.
• Use platforms like RMoney, which make investing in direct plans simple and transparent.
  Regular funds, on the other hand, may suit investors who want Advisory support from a financial advisor or distributor.

Conclusion
The difference in NAV between direct and regular mutual funds boils down to costs. Direct funds have a lower expense ratio, which translates into a higher NAV over time. By understanding how expenses impact your returns, you can make more informed investment decisions aligned with your financial goals.

Need Help?

Contact RMoney at 0562-4266600 / 0562-7188900 or email us at
askus@rmoneyindia.com