Is Your Mutual Fund House Playing Fair?
Nov 14, 2018

Author: PersonalFN Content & Research Team

If you invest in direct plans of mutual funds and read mutual fund disclosures regularly, you are likely to be a confused investor these days.

As you might know, the Total Expense Ratio (TER) is the total cost you incur when investing in a mutual fund scheme.

A few fund houses are raising TERs of their direct plans, while others are slashing them generously.

For instance, Mirae Asset India Equity Fund slashed its base TER under the direct plan from 1.09% to 0.64%. It also reduced the base TER of the Mirae Asset Emerging Bluechip Fund from 1.44% to 0.71%.(Source: Mirae Asset India's Mutual Fund's website)

Similarly, ICICI Prudential Focused Equity Fund and ICICI Prudential Small Cap Fund lowered their base TERs under direct plans to 1.25% and 1.27% from 1.30% and 1.52% respectively.
(Source: Notice from ICICI Prudential Mutual Fund)

On the other hand, Sundaram Select Focus Fund has increased the base TER from 0.49% to 1.48%. A significant rise, isn't it?  Likewise, Sundaram Mutual Fund has proposed to increase the expense ratio of few other schemes. (Source: Notice from Sundaram Mutual Fund )

Among other prominent funds, ICICI Prudential Discovery Fund hiked its base TER from 0.99% to 1.04% and ICICI Prudential Midcap Fund has increased from 1.12% to 1.14%.

Albeit marginally, the country’s one of the largest fund houses, HDFC Mutual Fund, also increased base TER for direct plans for various schemes. (Source: Notice from HDFC Mutual Fund)

Have mutual funds been unreasonable to investors?

In the recent past, the Securities and Exchange Board of India (SEBI) issued various circulars directing mutual fund houses to make investing in mutual funds less expensive for retail investors.  Following which some mutual fund schemes slashed their TERs charged under direct plans drastically. But surprisingly, some of them went on to increase the expense ratio.

We shall analyse the SEBI’s circulars in this regard to get more clarity on the subject.

SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018 states that, ‘All fees and expenses charged in a direct plan (in percentage terms) under various heads including the investment and advisory fee shall not exceed the fees and expenses charged under such heads in a regular plan’.

Further, SEBI decided to allow mutual fund houses to charge the ‘Additional TER of 30 basis points on daily net assets of the scheme based on inflows from beyond top 30 cities (B 30 cities) subject to certain conditions. In this regard, it has been decided that the additional TER can be charged based on inflows only from retail investors from B 30 cities’. This move was expected to encourage the participation in mutual funds from B-30 towns.

Prior to that, in the press release PR No.41/2018 dated September 18, 2018, SEBI had expounded on the topic of bringing transparency in the cost structure of mutual funds. It directed mutual funds that, ‘All commission and expenses, etc., shall necessarily be paid from the scheme only and not from the AMC/Associate/Sponsor/Trustee, or any other route. Further, the mutual fund industry must adopt the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission’.

Considering all the provisions mentioned above, technically, the only difference in the TER of a direct plan and a regular plan will only impact the distribution expenses.

The capital market regulator has categorically asked mutual fund houses to pass on the economies of scale to investors. This essentially means, large schemes should slash their TER. And in general, everything else remaining constant, i.e. investor mix, base TER under regular and direct plans, etc., the TERs of direct plans should fall (and not rise).

The implications…

The cost of investing in a mutual fund might rise because of the permissible hike in the TER for offering mutual funds in B-30 towns. But there’s a possibility that mutual fund houses have increased the base TER under both, regular and direct plans.

Have direct plans lost their edge as prime investment options?

Not necessarily. That’s because not all mutual fund houses are raising the TERs of direct plans.

On the contrary, some of them have preferred to make direct plans more attractive to investors. That said, there’s also a possibility that they were charging a higher base TER under direct plans (as compared to that under regular plans) until recently and now that SEBI has prohibited them from doing so, they are slashing the TERs of direct plans.

In the future, some mutual fund houses might hike their TERs selectively without making any regulatory breaches to compensate the loss of revenue on account of new cost structure prescribed by SEBI.

Why should direct plans be your preferred choice?

Please remember, if you invest Rs 10,000 per month in a direct plan of a mutual fund scheme through Systematic Investment Plan (SIP), you would possibly make an additional Rs 26.5 lakh in 20 years. 

There’s another benefit of investing through direct plans. You can easily avoid commission driven distributors and agents who often mis-sell. You get a chance to do your research on available investment options.

Investing in direct plans of mutual funds through robo advisory platforms can be even more rewarding for you.

What are Robo-advisers?

Robo-advisers are digital advisers that provide portfolio management and financial planning services online, without any human intervention. These types of advisers are usually more affordable than human advisers to all classes (of investors).

The advantage robo-advisers have is ‘zero-human-bias’ in the advice they offer. However, there could be few limitations in the way information is sought without human intervention.

A robo-adviser can offer you a world of convenience, thanks to the advancement in technology. Opt for a specialised robo-advisory service that will ensure your financial well-being through mutual funds—one that proves to be worth more than it costs.

Opt for robo-advisers who are genuinely concerned about your long-term financial well-being. Be careful of not investing your hard-earned money through fly-by-night operators.

And select a robo-adviser backed by established companies in the financial services space. Check if their investment recommendations are fully supported by their sound and ethical research processes. They should be fee-based to ensure that the commissions they earn do not influence their advice.

[Read: Here’s A Robo-Advisor Offering SOLID Mutual Fund Advice]

With a 24x7-service window, robo-advisers are the future of financial planning and investments in a time-strapped world.

Editor’s note:

Do you wish to invest in the direct plan of a good mutual fund scheme, but unsure about which robo advisory platform you should prefer?

Look nowhere else.

PersonalFN Direct is the right choice for you.

Our proprietary and exclusive Robo-Advisory platform is an online portal that can empower you to carry on your investment endeavours in the optimal way possible.

PersonalFN Direct’ comes backed by our research experience of 15+ years and stands apart from other Robo-Advisory platforms operated by commission-driven fintech companies and startups.

In a short span of time, PersonalFN Direct has earned the trust of hundreds of investors out there.

It provides you with an opportunity to build a solid and economical mutual fund portfolio of ‘Direct Plans’.

Through PersonalFN Direct, you can instantly invest in a ready mutual fund portfolio derived based on your risk profile. Our research team strategically designs each portfolio to suit your risk appetite.

All you need to do is answer a few basic questions to assess your risk appetite and you get instant access to the optimum portfolio suitable for you.

So what are you waiting for?

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Nov 19, 2018

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