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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Two direct-plan equity schemes have the same gross portfolio return of 12.0% a year before expenses. Scheme X has a total expense ratio of 0.8% and Scheme Y has 1.5%. Assuming returns are net of the expense ratio and compounding annually for 10 years on Rs 1,00,000, approximately how much more will Scheme X be worth than Scheme Y? (Use 1.112^10 ≈ 2.869 and 1.105^10 ≈ 2.714)

Scheme X will be worth about Rs 15,500 more. Net returns are 11.2% and 10.5%, giving Rs 2,86,900 and Rs 2,71,400 after 10 years of compounding on Rs 1,00,000. The lower expense ratio compounds into a meaningful difference.

  1. ARs 15,500Correct
  2. BRs 7,000
  3. CRs 30,900
  4. DRs 1,55,000

Explanation

Net return X = 12.0 − 0.8 = 11.2%, Y = 12.0 − 1.5 = 10.5%. Value X = 1,00,000 × 2.869 = Rs 2,86,900. Value Y = 1,00,000 × 2.714 = Rs 2,71,400. Difference = Rs 15,500. Using the 0.7% gap simply on the principal would give Rs 7,000, which ignores compounding.

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