ET Wealth, in its April 17, 2017 edition carried a debate on “Are mutual fund direct plans overcharging investors?”
Here’s the link on ET Wealth about that debate.
There were 4 views on the topic.
I weighed in too. The following is an expanded version of what is published there.
The proposition of a direct plan is clear. An investor who wishes to bypass the distribution channel and take the DIY approach to investments can opt for direct plans of mutual funds. As a result there is no charge towards commission or other services that are otherwise paid to a distributor or a third party. Even the servicing requirements of this direct plan investor are met directly by the fund house.
This is also clearly reflected in the expense structure of the fund. A direct plan expense ratio is lower than that of a regular plan, the difference being the trail commission paid to distributors. All other expenses such as fund management, brokerage, custodian, compliance, administrative, customer service, etc. are allocated based on standard costing methods. Basis this logic, the direct plan charges include all the relevant components.
Let’s look at a few examples of expense ratio of direct plans.
For equity, we will take the multicap category. Based on the numbers reported in the latest factsheets, the expense ratio of direct plans in this category ranges from 0.87% to 2.69%, the average being 1.64%. The former is for ICICI Pru Value Discovery Fund and the latter for Sundaram Select Micro Cap Series IV. (These are only examples, not recommendations)
For the 0.87% direct plan expense ratio, the corresponding number in its regular plan is 2.01%. The difference of 1.04% is the likely distribution commission it pays out.
Coming to debt – ultra short-term category, the expense ratio range is from 0.04 (Taurus Ultra short) to 0.70% (DHFL Pramerica Low Duration). For the Taurus fund, its regular plan expense ratio is 0.69%.
Now, we do know that trail commissions can average about 1% across funds, lower for debt funds and higher for equity funds. The math appears to be fine here.
Please note that SEBI caps the maximum expenses that can be charged to a fund scheme. Hence, there is little scope for reducing the expense ratio, except if the scheme reduces the fund management fees or SEBI lowers the expense ratio cap itself.
As for fund scheme size, as size grows, the scheme has an opportunity to lower expenses. Fund houses such as Quantum and PPFAS along with others are already paving the path in this direction.
What do you think?
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