Why is there a difference in the expense ratio of direct & regular plans?

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.

This article was originally published on April 19, 2018.