Cost of direct mutual funds dips

Opt for direct mutual fund plans only if you are wellversed with them. Otherwise, seek help from a financial planner

MUMBAI: The cost of direct mutual fund is set to come down further by January 2019. After the regulator Securities Exchange Board of India (Sebi) came down heavily on the asset management companies (AMCS) on their total expense ratio (TER), at least five mutual funds have slashed prices of their direct plans over the last few weeks.

TER is the cost of managing your mutual fund, which includes fund management fees, operational expenses, administrative expenses and distributor commission.

Companies, including Edelweiss Asset Management Ltd and Mirae Asset Management Ltd, have reduced their TER after the Sebi mandate in October this year.

“There was a Sebi circular that came out towards the end of October regarding transparency with regards to TER. It mandated that the pricing of direct plans has to be computed as regular plan expenses minus distribution cost,” said Radhika Gupta, chief executive officer, Edelweiss Asset Management Ltd.

Apte added that there were no official guidelines for this in the past.

“Post the circular, different AMCS took decisions on how they are going to price their funds for regular and direct plans. As far as Edelwiess AMC is concerned, expense ratio on our regular plans stays intact. We have adjusted our direct plans in accordance with the guideline,”apte said.

THE CHANGE

Every fund house has a regular plan and a direct plan for the same scheme. The idea behind a direct plan was that the trail commission will get removed and you will get a cheaper plan.

Suppose the expense ratio is 200 basis points (bps) and trail commission is 100 bps, then the direct plan should be cheaper by 100 bps.

One bps is one-hundredth of a percentage point. However, mutual fund companies began to expand the costs in direct plans by increasing the fee for asset manager. As a result, the difference between direct and regular plans fell from 100 bps to 50 bps or 60 bps.

“There are three different things that have happened. Earlier, there used to be an exit load taken by the AMCS for marketing expenses. Sebi then said they can’t do it and mutual funds have to put the exit load cost back into the scheme. To compensate, Sebi allowed them to charge an additional 15bps,” said Prateek Pant, co-founder and head, products and solutions, Sanctum Wealth Management.

“Typically it was meant to take care of all marketing expenses. However, the AMCS loaded it in the direct plans as well, which is against the spirit of regulation,” said Pant.

In the October circular, the regulator said that all expenses will have to be paid from the scheme. “Because of the October circular, the TER on direct plan is actually going to come down dramatically,” said Pant.

According to Pant, in the next month, expense ratio for all mutual funds will come down by up to 35bps. “I see TER to be somewhere around 65-70 bps for your largest funds in direct plan. These two recent steps will cause a dramatic fall in expenses ratio in direct fund. You will see it in the next one month. January onwards, direct plans will have a new TER,” he said.

Meanwhile, several AMCS have still not cut the cost. However, planners believe this is a transition period and the new rates will come into effect soon. “Edelweiss AMC and Mirae AMC cut expense ratio on direct plans dramatically in the last two weeks. If you look at HDFC small cap, the expense ratio on direct plan is at 0.60% and for regular plan it is at 2.25%. In next couple of months you will actually see it normalise. Most AMCS should do it. Currently, it is the transition happening and so there is a distortion. This will normalise,” said Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.

SHOULD YOU OPT FOR DIRECT PLAN?

While opting for mutual funds if you are wondering whether you should opt for

Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors. a direct or regular plan, the answer lies in your understanding of the investment instrument and not the cost of the plan.

If you want to opt for the direct plan and need handholding, it would be prudent to take help from a fee-based financial planner who can give you unbiased advice. If you are a do-it-yourself investor, direct plans may work for you.

But make sure you do your research before investing. If you don’t understand mutual funds well, don’t opt for direct plans just because it is cheaper. It is ideal to consult a financial advisor.