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Why is there a difference in the expense ratio of direct & regular plans?
Dhirendra Kumar explains why and how the expense ratio differs for regular & direct plans
19-Apr-2018 •Research Desk
Factsheet shows expense ratio and it varies, is it one monthly basis or annual basis? Why is the expense ratio so different for regular and direct plans?
- Kamal, Delhi
Transcript: It is an annual expense which includes annual charges, service tax, etc. As per Sebi regulation, fund house can apply a maximum annual charge of up to 2.50% if their fund size if less than Rs 100 crores and up to 1.85% if the fund size has an AUM of around Rs 1000 crores. Over and above this, there are a few other charges like service tax, which is currently 12.5% of these annual charges. With GST, it is expected to increase to 18%. Then there is an additional B15 incentive which is given to fund houses, which allow them to charge more if they have a coverage in small cities (B15 cities). For regular plans, the expenses are more as compared to direct plans, as there are intermediaries involved and their commission/fee is a part of this expense. Whereas, in direct plans, the expenses reduce by this fee and hence the expense ratio is lower. Although, there are quite a few inconsistencies that need to be addressed and tackled in the mutual fund direct plans. As of now 1/5th to 1/6th of the return is reduced by way of expense ratio for equity and debt fund plans.
This question was originally answered in April 2017.
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