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Cost reduction in DIRECT plans of mutual funds
Opt for direct plans in mutual fund plans only if you are well-­versed with them. Otherwise, seek help from a professional advisor.

The cost of direct plans in 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.

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

Post the circular, different AMCs took decisions on how they are going to price their funds for regular and direct plans.

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.

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.

TER is seen to be somewhere around 60-70 bps for large 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.

Meanwhile, several AMCs have still not cut the cost. However, it is believed that 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 0.66% and for regular plan it is at 2.11%.

While opting for mutual funds if you are wondering whether you should opt for 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 hand-holding, it would be prudent to take help from your fee-only advisor who can give you unbiased advice. If you are a do-it-yourself (DIY) 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.
Source: HT
Atul Mishra CFPCM, CWM, MFP, CII(Award), DipCISI
SEBI Registered Investment Adviser
(Registration No. INA000004245)
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