The net asset value (NAV) of a regular dividend plan that I invest in is lesser that of a direct dividend plan. Why?
—Prasenjit Pal
To understand why the NAV of a direct mutual fund (MF) plan is higher than that of the corresponding regular plan, we need to understand both the concept of NAV as well as the difference between the two plans. NAV of a fund is the total value of all the assets held by it (in its portfolio) divided by the number of outstanding units (held by investors in the MF). This number, as you can see, is proportional to the value of the assets held by the fund. So, as the value of the fund’s portfolio grows, NAV grows (assuming the number of units remains same).
The difference between direct plans and regular plans is that the expense ratio is lesser with direct plans for the same schemes. This means more money stays in the fund when compared to the regular plan of the same scheme. So, the portfolio of the direct plan of a scheme (which is the same as that of the regular plan of the same scheme) goes up faster in value than the regular plan. Due to this, the per-unit NAV also goes up faster for the direct plan of a scheme when compared to that of the regular plan.
Please note that this does not mean that the direct plan is less desirable than the regular plan. In fact, when it comes to growing your investment, because of this same reason, the direct plan of a scheme will grow faster because, as noted earlier, the value of its assets grows faster due to lower expenses.
