Now Reading: Direct vs regular mutual funds: expense ratio gap matters
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Direct vs regular mutual funds: expense ratio gap matters
Mutual fund investors choosing between a direct plan and a regular plan for the same scheme may see different returns and Net Asset Values (NAVs), even though the underlying portfolio, fund manager…
Mutual fund investors choosing between a direct plan and a regular plan for the same scheme may see different returns and Net Asset Values (NAVs), even though the underlying portfolio, fund manager and investment strategy are identical. The difference lies entirely in the expense structure.
A regular plan is sold through intermediaries such as distributors or banks, who receive a commission from the Asset Management Company (AMC). That commission is built into the scheme's expenses, giving regular plans a higher expense ratio typically 0.5% to 1% or more higher than the direct plan. A direct plan, bought directly from the AMC without an intermediary, has no such distribution cost.
Over time, the compounding effect of a lower expense ratio can make a meaningful difference. An annual difference of 0.75% on a reasonably large portfolio could add up to lakhs of rupees over 10 or 20 years. For investors comfortable choosing and managing their own funds, a direct plan may be the more cost-effective option.
Indian Opinion Analysis
The key background most investors miss is that the gap between direct and regular expense ratios is set by the AMC, not by regulation, though SEBI caps total expense ratios by scheme type. Under SEBI's 2018 circular, the maximum expense ratio for an equity scheme with assets under Rs 500 crore is 2.25% for a regular plan and 1.50% for a direct plan. For a debt scheme the caps are lower. The practical consequence is that a regular plan investor with a Rs 10 lakh portfolio paying an extra 0.75% annually loses roughly Rs 1.78 lakh over 15 years assuming 10% annual returns. SEBI does not mandate any minimum distributor commission, so the gap varies by AMC.
Source: livemint.com
This story was synthesised by AI from the source linked above.
