I am confused with the net asset value (NAV) of my mutual fund investment. Why is the NAV of the regular dividend plan lesser than that of a direct dividend plan?
Kalpana Sen, Kolkata
First, you need to know how the NAV is arrived at. The 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 mutual fund. This number is proportional to the value of the assets held by the fund. Assume that the number of units in a mutual fund remains constant and the value of the fund’s portfolio grows, which means the value of the NAV grows.
Now, the difference between direct plans and regular plans of the same mutual fund scheme is that their expense ratios vary – the expense ratio of direct plans is lesser than that of the regular scheme of the same fund. What this means is that 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. The NAV of the direct dividend plan is higher than that of the regular plan for this reason alone – the lower expense ratio in case of the direct plan.