Mutual Funds: SEBI Mulls on Extra Charges for Direct Plans

Markets regulator the Securities and Exchange Board of India (SEBI) is mulling over giving the go-ahead to mutual funds to charge higher expenses to investors for direct plans.

As no intermediary is involved in direct plans, investors are not required to pay brokerage or commission charges or management fees to the mutual fund. That is why the returns increase as the expense ratio is relatively lower in this case.

Investors will feel the pinch of the move as higher expenses could lead to a dip in scheme returns. As far as Asset Management Companies (AMCs) or fund houses are concerned, it would prove to be beneficial to address additional costs required in the case of the promotion of direct plans through marketing and sales.

Direct investments form 24% of individual assets, as per the data of the Association of Mutual Funds in India (AMFI). Typically, investors save 80-100 basis points (bps) in direct equity plans compared to regular equity plans.

All this while, the lower expense ratio of direct plans ensured higher returns on investment, especially in the context of longer time horizons.

An investor capable of undertaking independent research and zeroing in on funds on their own can suitably opt for direct plans. Generally, seasoned investors who have experience investing in the stock market can go for direct funds.

According to a recent SEBI report, About 66% of direct funds outperformed their benchmark over a 10-year timeframe compared to 39% of regular funds, as per a SEBI report.

Similarly, 45%t of the direct funds outperformed their benchmark in the past five-year period compared to 26% of regular funds. In the past few years, digitisation and the rise of fintech platforms have contributed toward the growth of direct plans.