The Securities and Exchange Board of India (SEBI) has implemented a new rule requiring mutual fund houses to disclose the expense ratios separately for direct and regular mutual fund plans. This initiative aims to increase transparency and help investors better understand the costs associated with their investments.
Direct plans were introduced in 2013 to allow investors to invest directly with mutual fund houses without the involvement of distributors. Direct plans generally have a lower expense ratio than regular plans without distributor fees. As a result, the returns for direct plans tend to be higher since fewer charges are deducted.
On the other hand, regular plans include distribution costs and commissions paid to intermediaries. These additional expenses are reflected in the higher expense ratio, which can impact long-term returns. For instance, an investment of ₹10 lakh in a direct plan with a 0.5% expense ratio could grow significantly more than the same investment in a regular plan with a 1.5% expense ratio over a period of 20 years.
The new disclosures mandated by SEBI will also require fund houses to present returns separately for direct and regular plans on a half-yearly basis and in compounded annualised terms. This will make it easier for investors to compare the costs and performance of each plan type, facilitating better-informed decisions.
While the transparency in expense ratios is a positive move, experts suggest that the expense ratio is just one of many factors to consider when investing. Investors need to evaluate their goals, risk appetite, and the need for professional guidance before choosing between direct and regular plans.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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