Mutual Funds investor might have to pay extra for direct plans after SEBI’s this decision

The Securities and Exchange Board of India is mulling over to allow mutual funds to charge higher expenses from investors for direct plans.

Such plans bypass distributors. They also have a lower expense ratio than the regular plans, reported The Hindu's Business Line. The plan may also include the brokerage or commission paid to distributors of the regular plans.

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“Direct plan expenses should be defined by actual expenses incurred, and not by how much brokerage is paid in regular plans,” a senior fund official told BL.

According to the report, regular plans subsidise the indirect cost of running a direct plan to some extent. However, subsiding the cost gets difficult when plan increases and contains around 30 to 50% share of the asset under management. Mutual funds remain a push product and AMCs get marketin, sales and other costs in selling direct plans. However, it would not be feasible for AMCs to promote direct plans without any relaxation, another official told BL.

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What are Mutual Funds direct plans?

According to Association of Mutual Funds in India, a ‘Direct Plan’ is the one in which one may invest directly, without involving or routing the investment through any distributor/agent. In another case, investors can also opt for a ‘Regular Plan’ in which one may invest in mutual funds with the help of a Mutual Fund distributor/agent.

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Direct Plan has lower expense ration than another one. This is mainly because there is no distributor/agent involved. This helps investors save more in terms of distribution cost/commissions paid out to the distributor/agent, which is added back to the returns of the scheme. Hence, a Direct Plan has a separate NAV, which is higher than the “Regular” Plan’s NAV.

In long run, the lower expense ration of Direct Plan transforms into higher returns on investment. THis is the main reason why, Direct plans investment is more lucrative over a period, in comparison to investment in Regular Plan of the same scheme.