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New low for expense ratio in funds

With the launch of 'Direct Plans' in funds, investors can avoid paying distributor commissions

In September 2012, Sebi came out with several reforms in Mutual Funds and launching Direct Plans was one of them. Now, every AMC has launched these plans and they allow investors to invest directly with an Asset Management Company (AMC) without paying the distributor commission. AMCs usually charge 2.5% annually from investors. Around 0.40-0.75% of this 2.5% annually is paid to distributors. Now, investors can avoid paying these commissions and it will translate into more returns for investors every year.

Earlier, there was this option of directly investing with an AMC through visiting its office and website. But, investors were still being charged these commissions. So, Sebi mandated each AMC to launch these direct plans.

Now, there will be mainly two plans under a fund: Regular & Direct. Earlier, there were multiple plans like retail, institutional and super institutional. Now, all multiple plans have been scrapped. So, regular plans will be the existing plans where distributor commissions are paid unlike direct plans where investors will not be charged these commissions.

Who can invest?
Investments under the Direct Plan are open to all categories of investors who choose to invest without routing the transaction via a distributor.

Modes of investing into Direct Plans
Investments under Direct Plans can be made through various modes offered for investing directly except Stock Exchange platform(s) and any other platform(s) where investors’ applications for subscription of units are routed through distributors. Investors subscribing under this Plan of any scheme will have to indicate the Scheme / Plan name in the application followed by “Direct Plan”. Additionally, investors should mention “Direct” in the ARN column of the application form.

Difference Between “Existing Plan” and “Direct Plan”
The “Direct Plan” has a lower expense ratio as compared to existing plans in the same schemes since there is no commission to be paid to the distributor under this plan. Because there is a difference in the expenses charged by the Direct and Existing Plans under every scheme, there will be a difference in the NAVs for both these Plans.

Available Schemes
All Open-ended schemes
New Fund Offer of Fixed Maturity Plans under close-ended schemes launched on or after January 1, 2013
Interval Schemes (commencing from the first day of the Specified Transaction Period immediately after January 1, 2013).
All Plans / Options / Sub-Options offered under the schemes will also be available for subscription under the “Direct Plan” (except Plans / Options / Sub-Options that have been discontinued).

Non eligible schemes
“Direct Plan” will not be offered under Exchange Traded Funds and those plans under existing schemes which have been discontinued for further subscriptions.

What will not change
The schemes portfolio will be the same for both “Existing plan” and “Direct Plan.”And, the scheme characteristics such as Investment Objective, Asset Allocation Pattern, Investment Strategy, Exit Load, risk factors, facilities offered and other terms and conditions will continue to be same.