SEBI: Disclose Expense Ratios Of Mutual Funds On A Daily Basis. A Hint For Investors To Opt For Direct Plans?   Jun 08, 2018

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Impact
 
Disclose Expense Ratios Of Mutual Funds

Have you ever bothered to check how much mutual fund houses charge you to manage your investments with them?

If you haven’t, you are not alone.

Many investors don’t track the expense ratios of the schemes they are invested in. The cost structure of the mutual fund schemes can vastly affect the potential returns your portfolio might generate in the future.

Many times, the scheme’s performance is highlighted in various investor communications, directly or indirectly, but the expense ratio is not.

To improve transparency in the operations of mutual funds, the Securities And Exchange Board of India (SEBI) recently advised them to declare the Total Expense Ratio (TER) of each scheme on daily basis on their own website as well as on the Website of Association of Mutual Funds in India (AMFI).

As reported by the Economic Times dated June 06, 2018, SEBI circular in this regards reads as below:

AMCs (Asset Management Companies) shall prominently disclose on a daily basis, the TER (schemewise, date-wise) of all schemes under a separate head - 'Total Expense Ratio (TER) of mutual fund schemes' on their website and on the website of AMFI.

Investors must be notified of any change in the TER, as against the previous TER adjusted for additional expenses allowed by SEBI, through an official communication.

Can it help you take better decisions?

PersonalFN believes it’s a great initiative and this will make investors mindful of the cost-element involved in mutual fund investing.

However, investors should not only check the expense ratios of various schemes, but should also see the difference between the direct plan and the regular plan of the same scheme.  

Investing in direct plans can boost the returns significantly.

What’s the difference between regular plans and direct plans?

Regular Plan —This is the conventional plan, where you invest/transact through your mutual fund distributor / agent / relationship manager. The recommendations are usually guided by the mutual fund distributor / investment advisor / relationship manager, and there is after-sales support and service. Indirectly, the fund house pays the commission on the money you invest through distributors / relationship managers. Hence, due to the distribution cost involved, you incur a higher expenses ratio in a regular plan.

Direct Plan — On the contrary by opting for the direct plan, you eliminate the services of a mutual fund distributor / agent / relationship manager. There is no guidance. You do your own research or bank on mutual fund research reports to invest. The transactions can be performed online or even physically by visiting the registrar’s or the asset management company’s office. And since, transactions are routed directly; no commissions are paid by the fund house on the money you invest. Hence, the expense ratio for a direct plan is lower compared to Regular Plan.

The importance of extra savings is realised when markets are turbulent, and generating high returns becomes difficult. And over a period of time, these savings, by the way of lower expense ratio, become too substantial to ignore.

If you are investing Rs 10,000 per month in a direct plan of a mutual fund scheme through Systematic Investment Plan (SIP), there’s a possibility to make additional Rs 26.5 lakh in 20 years.

PersonalFN studied the expense ratio structures of 178 prominent diversified equity mutual funds to understand the quantum of difference direct plans can make.

And here are some interesting observations

Regular plans No. of schemes
Schemes with an expense ratio of more than 1.5% 174
Schemes with an expense ratio of more than 2.0% 165
Schemes with an expense ratio of more than 2.5% 73
Sample size 178
(Source: ACE MF)

Mutual funds incur high distribution costs and other administrative expenses which are passed on to investors in the form of higher expense rations.

Compared to that, when investors approach fund houses directly, there's a great deal of saving, which too, is passed on to mutual fund investors.

Direct plans No. of schemes
Schemes with an expense ratio of less than 1.0% 27
Schemes with an expense ratio of less than 1.25% 67
Schemes with an expense ratio of less than 1.50% 104
Sample size 178
(Source: ACE MF)
Some more observations…
  • The average difference between regular plans and direct plans is 1.0%. In other words, on an average, investing in direct plans results in savings of 1.0% p.a.

  • The difference between regular plans and direct plans of newer schemes is higher than that between older schemes in many cases.

  • The highest difference between a regular plan and a direct of the same scheme is 2.64%. This goes to show, some schemes are being promoted by paying huge commissions.

  • However, it's also observed that, some poorly performing schemes have a lower expense ratio under both, direct and regular plans.

But, investing in direct plans isn’t enough to select a mutual fund scheme for your portfolio.

There’s much more.

To select winning mutual funds, watch this video:

Choosing the right scheme for your portfolio is imperative.

Pay attention to your age, risk profile, investment objectives, financial goals, time horizon, and asset allocation so that you to have the most appropriate mutual fund schemes  in your portfolio to help accomplish your envisioned financial goals.

And finally, when you invest, Direct Plans are worthy.

But, investing in direct plans of unworthy mutual fund schemes won’t help you increase your total returns. That’s where mutual fund scheme selection backed by thorough research plays a crucial role.

Moreover, you need to regularly evaluate the performance and review your mutual fund portfolio.

Now, wouldn’t you be delighted if PersonalFN helps you select winning mutual fund schemes at a nominal cost and invest in direct plans?

PersonalFN will bring to you, ‘PersonalFN Direct’ a robo-advisory platform very soon.  We’ve begun pre-registrations.

 And here’s an opportunity to sign up for PersonalFN Direct right away, as a founder member…

 If you sign up right away as a Founder Member, you will get a year’s subscription to PersonalFN Direct at a mere Rs 950/-, which is more than 80% off the actual price.

 What’s more?

 We will add another year’s access to PersonalFN Direct to your account ABSOLUTELY FREE! That’s a saving of a whopping Rs 5000/- right away.

 So, hurry and sign up now!

 PersonalFN Direct is arguably the most experienced Robo-adviser around. After all, it is backed by over 20 years of PersonalFN’s experience.

Home Loans, Car Loans, And Personal Loans To Become Expensive. Here's Why…

Impact

With all the bad wrap banks are getting these days, one would think they would be quick to clean up their act.

Are banks being unfair to you, their customer?

They are, indeed!

When the interest rates cool off, they resist passing them on to the borrowers. On the other hand, during such phases, they are quick to slash deposit rates.

Similarly, when the borrowing rates go up, banks start a race with one another to hike rates.

You’re witnessing similar behaviour today.

To read more please click here.

Unsure When To Review Your Mutual Fund Portfolio? Read This…

Impact

Would you wear woollen apparels during summers and swimwear during winters?

And here, your reaction is…

“What a silly question! These are misfit combinations.”

However, there’s nothing wrong per se with having woollen clothes and swimwear in the same wardrobe.

Depending on your living conditions and personal choices, your wardrobe will have a combination of summer and winter special clothing. If you live in the tropical climate, you won’t need four-layered suits. But if you were to visit Antarctica, you will certainly need them.

To read more please click here.

BOI AXA Arbitrage Fund: Should You Invest?

Impact

BOI AXA Arbitrage Fund (BAAF) is an open-ended arbitrage fund mandated to invest upto 65% of its net assets into equity and equity related instruments. The scheme’s investment objective is to generate income through arbitrage opportunities between cash and derivative segments of equities.

The term ‘Arbitrage’ refers to the simultaneously buying and selling of a security in two different markets, with an aim to gain from the price difference. Since, the transactions are in either direction, the positions are completely hedged. Hence, arbitrage transactions are virtually risk-free.

Click here to read the complete note

FUND OF THE WEEK

DSP BlackRock Micro Cap Fund Has Been Graduated To a Small Cap Fund

Competition plays an important role in any business. It gives one the motivation to sharpen the edge in order to succeed and prove superiority over its peers.

However, DSP BlackRock Micro Cap Fund has experienced monopoly for years, with no direct competition. Its focus on very high risk oriented micro-cap stocks made it bold and special.No wonder the fund was meant exclusively for very high risk takers, who are fine putting their capital at risk for extra ordinary returns.

Click here to read the complete note...

And Other News...

With the RERA—Real Estate (Regulation & Development) Act protecting homebuyers from the unethical practices and errant behaviour of developers, coupled with the government’ emphasis on the Pradhan Mantri Awas Yojana, real estate investments are likely to become more attractive in the coming years.

Sensing a business opportunity, Axis Mutual Fund, has planned to raise Rs 500 crore which it endeavours to deploy in 8-10 residential properties employing the capital preservation strategy. The fund house may retain subscriptions upto Rs 350 crore.

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Financial Terms. Simplified.


Total Expense Ratio (TER): The total expense ratio (TER) is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER, most often referred to as simply "expense ratio."

(Source: Investopedia)


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