First-time investor path · Lesson 5 of 7 · 7 min
Costs compound too: direct plans and the fee drag
Fees are the only part of investing you control with certainty — and they are charged every year on your entire corpus, not just your contributions.
Where the money leaks
Every mutual fund charges an expense ratio — a percentage of the corpus deducted annually to run the scheme. The same scheme usually comes in two versions: the Regular plan (the distributor trail commission is baked into a higher expense ratio) and the Direct plan (you buy from the AMC or a no-commission platform, at the lower ratio).
The typical direct–regular gap for equity funds is around 0.8–1.2 percentage points (assumption below: 1%). One percent sounds trivial. It is charged on the whole corpus — including all previous growth — every single year, so it compounds against you exactly the way your returns compound for you.
The defence is boring and complete: prefer direct plans, check the TER printed in the scheme's factsheet, and remember that every extra percent of cost is a percent of return you need the market to make up first.
What a 1% expense gap does over 20 years
Assumptions: ₹10,000 monthly SIP, 20 years; both plans earn 12% gross; the Regular plan's extra expense ratio cuts its net return to 11%.
Direct plan (12% net)
r = 1%/month, n = 240 → 1.01²⁴⁰ = 10.8926 → FV = ₹10,000 × ((10.8926 − 1) ÷ 0.01) × 1.01 ≈ ₹99.91L
Regular plan (11% net)
r = 0.9167%/month → 1.009167²⁴⁰ = 8.9353 → FV ≈ ₹87.36L
Fee drag
₹99.91L − ₹87.36L = ₹12.56L
As a share of the direct corpus
₹12.56L ÷ ₹99.91L ≈ 12.6% of your ending wealth
Same fund, same gross returns, same contributions — the Regular plan hands over roughly ₹12.6 lakh of your ₹1 crore outcome, about one-eighth of everything you could have owned.
Drag the fee and watch the gap
Set your SIP and the expense-ratio gap between direct and regular — see the corpus both ways and what the difference costs.
Given away to fees in 20 years
₹12.56 L
Direct-plan corpus instead
₹99.91 L
Same fund, same gross returns — only the expense ratio differs. The fee is charged every year on the whole corpus, so the gap compounds against you.
Figures are labelled assumptions for teaching, not forecasts — see the sources note at the end of this lesson.
Misconception check
An agent sets up your SIP in a Regular plan and charges you nothing. He says: 'The AMC pays me, not you.' Is he right?
Ends in a tool
Quantify your own drag
Enter your SIP and the two plans' TERs; see the rupee cost of the commission trail over your holding period.
Quantify your own dragWhere the numbers come from
- Assumption: 1 percentage point direct–regular TER gap (typical equity-fund range ≈ 0.8–1.2pp)
- Assumption: 12% gross return for both plans
No live prices or NAVs are used anywhere in this path. Lesson 5 of 7, First-time investor path.
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