In a potential shift that could impact mutual fund investors, the Securities and Exchange Board of India (SEBI) is mulling over permitting mutual funds to levy higher expenses on direct plans. But what does this mean for the average investor?

Direct Plans: A Quick Primer

Direct plans, in essence, allow investors to sidestep distributors, resulting in a lower expense ratio compared to regular plans. The savings come from avoiding the brokerage or commission typically paid to distributors. For instance, if a regular equity scheme charges 150 basis points and the distributor’s commission is 50 bps, the direct plan’s charge is capped at 100 bps.

The Proposed Change?

According to a Hindu Businessline report, SEBI’s consideration revolves around narrowing the expense gap between these plans. Insiders speaking to the publication suggest that the regulator might permit direct plans to charge up to 70%, 80%, or even 90% of the distributor commission. Using our earlier example, this could mean a direct plan might charge up to 115 bps if SEBI allows a 70% reduction.

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Implications for Investors?

While this move might bolster mutual fund houses by covering costs associated with promoting direct plans, it’s not all rosy for investors. Higher expenses can nibble away at scheme returns, potentially diminishing the allure of direct plans.

However, it’s worth noting that direct plans, despite the potential cost increase, might still offer better returns over the long haul. Recent SEBI data reveals that over a decade, 66% of direct funds outperformed their benchmarks, compared to 39% of regular funds.

Why the Change?

The rationale behind this potential shift is multifaceted. Some industry insiders argue that regular plans, to a degree, offset the indirect costs of direct plans. But as direct plans burgeon, accounting for a larger chunk of assets under management, this balancing act becomes challenging. Moreover, with the pandemic-driven digital surge and the rise of fintech platforms, direct plans have gained traction.

While direct plans have traditionally been a favourite for savvy investors keen on independent research, this potential SEBI move could alter the landscape. It remains to be seen how this plays out, but one thing’s for sure: investors should keep a keen eye on developments and recalibrate their strategies accordingly.

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