What is so crucial about SEBI’s proposal to allow mutual funds to charge higher expenses for direct plans? Direct plans are those that bypass distributors and are sold directly to investors through online platforms or directly by the fund house. They typically have lower expense ratios than regular plans, which are sold through distributors.
What is SEBI’s proposal?
SEBI‘s proposal is to allow mutual funds to charge higher expenses for direct plans up to the extent of the brokerage or commission that they would have paid to distributors for regular plans. This means that investors in direct plans could see their expenses go up by a few basis points.
Why is SEBI considering to allow higher expenses for Direct Mutual Funds?
SEBI is considering this proposal in order to address the growing popularity of direct plans. Direct plans have been growing at a much faster rate than regular plans in recent years. In 2022, net inflows into direct plans were ₹10.3 trillion, while net inflows into regular plans were ₹7.3 trillion.
How will this proposal affect investors of Direct Mutual Funds?
If SEBI goes ahead with this proposal, it could have a significant impact on investors. Investors who invest in direct plans could see their expenses go up by a few basis points. This may not seem like a lot, but it could add up over time.
Moreover, if expenses of direct and regular plans are similar, any mistake in fund selection on the part of the naive investor, would lead to lower returns over time. For someone who does not understand investment avenues or do not have the time to study, it is always better to have a trusted advisor.
What can investors do to avoid these fund management expenses?
There are a few things that investors can do to prepare for this change. First, they can start to compare the expense ratios of direct and regular plans. Second, they can consider investing in index funds, which typically have lower expense ratios than actively managed funds. Third, they can invest in direct plans through a discount broker, which can help to lower their costs.
Although, the flip side of investing in index funds is that you are letting go of any chance of outperforming the index, rather, settling for the average returns that the index provides, less the cost of the fund.
SEBI’s proposal to allow mutual funds to charge higher expenses for direct plans is still at a preliminary stage. It is not clear whether SEBI will go ahead with the proposal, or if it does, what the final impact will be on investors. In the meantime, investors should start to educate themselves about the proposal and how it could affect them.