Mutual fund commissions cut 25% of investor wealth in 80% of schemes over 10 years: Report

Hidden distributor commissions in regular mutual funds can drain up to 25% of an investor’s potential wealth compared to direct plans, according to a study by 1 Finance Research.

The analysis shows that over a 10-year holding period, more than 80% of equity mutual fund schemes leave regular-plan investors with at least a 25% lower value on their original investment versus direct plans of the same scheme. And nearly one in five schemes record a wealth gap exceeding 50%, driven solely by the compounding effect of higher expenses

The study highlighted that commissions are one of the most persistent yet least visible forces shaping investor outcomes. Distributor commissions, which are built into the TER of regular plans, steadily reduce returns over time despite both plans investing in the identical portfolio. Meanwhile, direct plans benefit from lower costs, but longer holding periods in regular plans can only partially offset, not eliminate, the impact of higher expenses.

It further showed that the wealth erosion from regular-plan commissions accelerates with time, not linearly, and mild gaps seen over five years expand into deep value erosion over longer holding periods.

Over a five-year period, 53% of schemes lose 15% or more of the original investment in regular plans versus direct plans, 1 Finance Research said in the report. The wealth gap is not a result of scheme selection, but is instead linked to the higher costs built into regular plans.

Based on the data as of March 2024, the study shows that regular plans continue to dominate assets, with 21.2% of regular investments held for over five years, compared to 7.7% in direct plans, underscoring the persistence of commission-led distribution despite sustained underperformance.

“Cost differences may look small in a single year, but when they persist across market cycles, they meaningfully reshape investor outcomes. Our analysis shows that the erosion in Regular plans is structural, not episodic,” said Rajani Tandale, Senior Vice President – Mutual Fund at 1 Finance.
Tandale added: “What adds nuance to this is also the investor behaviour, our data shows that 21.2% of Regular investments are held for more than five years, compared to 7.7% for Direct plans as of March 2024. While longer holding periods generally aid compounding, higher embedded costs can significantly dilute that benefit over time.”

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The study showed that commissions embedded in regular mutual fund plans can materially erode investor wealth over time. While regular plans may encourage longer holding periods, higher expense ratios remain a decisive drag on outcomes. The findings reinforce that plan selection is as critical as fund selection, as small cost differences can compound into substantial wealth gaps.

The study analysed AMFI NAV data for Direct-Growth and Regular-Growth equity mutual fund schemes across major categories. Schemes with at least five years of history were used for mid-term analysis, and those with ten years for long-term analysis. A uniform Rs 100 investment from the same start date was assumed to isolate the impact of cost differences between the two plans.

1 Finance is backed and mentored by marquee investor Marwadi Chandarana Group — a pioneering force in India’s financial services sector that also powers successful operations in the fields of education and alternative energy. The financial institution is dedicated to delivering holistic financial planning tailored to one’s individual needs and life aspirations. Through the expertise of qualified financial advisors, 1 Finance guides individuals towards peace of mind by offering hyper-personalised and unbiased advice, empowering them to attain a state of financial well-being.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)