Most direct plans have become cheaper for investors.
With the ban in upfront commission, the expense ratio under direct plans of many schemes have come down substantially.
An analysis of the latest TER structure of a few AMCs shows that the difference between direct plans and regular plan has increased, in fact, it is close to 1.50% in a few schemes.
Earlier, SEBI had clarified that all fees and expenses charged in a direct plan (in percentage terms) under various heads including the investment and advisory fee should not exceed the fees and expenses charged under such heads in a regular plan. Simply put, the difference between the expense ratio of direct and regulator plans would now be to the extent of distribution commission.
Experts attribute this to the
reduction in GST component. So far, scheme expenses were fungible i.e. disclosing the base TER without giving segregation of various expenses. Now, with this going away, fund houses can charge GST component in management fees only instead of the entire cost. SEBI has asked fund houses to disclose break up of their expenses such as management fee and other expenses separately in half yearly consolidated account statement.
A CEO of a foreign fund house pointed out that the reduction in TER of direct plan is due to genuine difference between regular and direct plans. “A few fund houses had reportedly charged higher expense ratio in direct plans due to fungibility. In some cases, the difference between expense ratio of direct plan and regulator plan was marginal. With the intervention of market regulator, the difference between expense ratio of direct plan and regular plan of a scheme would be genuine.”
Another CEO said that the move would now reflect who is paying what. “Another key advantage of this is that everyone will come to know the quantum of trail commission paid by fund houses.”
