Over 80% of mutual funds erode 25% of regular-plan investor wealth: Report

Ten-year data shows commissions matter more than most investors realise

Hidden commissions embedded in regular mutual fund plans can significantly reduce investor wealth over the long term, even when the underlying portfolio remains the same. New research by financial planning firm 1 Finance shows that for investors holding equity mutual funds for a decade, the impact of higher costs can be far more severe than it appears on the surface.

 

The study finds that in more than 80 per cent of equity mutual fund schemes, investors in regular plans ended up with at least 25 per cent lower wealth compared to those investing in the direct plan of the same scheme over a 10-year period.

 

 

Direct and Regular Fund Commision Disparity

Why do regular plans fall behind?

Regular and direct plans invest in identical portfolios. The difference lies in costs. Regular plans carry distributor commissions, which are built into the total expense ratio (TER). While this difference may seem small in a single year, it compounds steadily over time.

 

According to the study, nearly one in five equity schemes showed a wealth gap of over 50 per cent between regular and direct plans over 10 years, purely due to higher expenses. The research highlights that the erosion in returns accelerates with time rather than increasing in a straight line.

 

In shorter holding periods, the gap may appear manageable. Over longer horizons, however, the cost difference becomes difficult to ignore.

 

How Commissions Can Erode Investor Health.

Five years enough to feel the pinch

The impact is visible even over medium-term horizons. Over a five-year period, more than half of the schemes analysed showed a loss of at least 15 per cent in investor wealth in regular plans compared to direct plans.

 

Importantly, the study notes that this gap is not driven by fund performance or category selection. It is largely the result of higher, recurring costs that continue to weigh on returns year after year.

 

Why investors still stay invested?

Despite weaker outcomes, regular plans continue to dominate assets. Data cited in the study shows that over one-fifth of regular-plan investments are held for more than five years, compared with less than 10 per cent for direct plans.

 

This suggests that distributor-led advice may encourage longer holding periods. However, higher costs significantly dilute the benefit of staying invested for longer.

 

The findings underline a simple but often overlooked point, choosing the right plan matters as much as choosing the right fund. Small differences in annual costs can compound into large wealth gaps over time. For long-term investors, understanding where returns are being quietly eroded could make a meaningful difference to financial outcomes.