Mutual Fund Expense Ratio: Direct Plan vs Regular Plan

Published: July 30, 2016 at 7:43 am

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The expense ratio of direct mutual fund plans is a subject of debate among those who do not benefit from it. In this post, Balaji Swaminathan digs deep into the annual reports from three AMCs to understand how the expense ratios compare and whether the absence of commission is the only reason for the lower expense ratio in direct plans.

This is a significant improvement over the previously published Understanding the Total Expense Ratio of a Mutual Fund using the annual report of FT Smaller Companies fund. Before we look at that fund again, let us consider a simple case.

HDFC Top 200 Expense Ratio Analysis

First, Balaji compiled the quarterly AUM (qAUM) averages for direct and regular plans from AMFI. He then used the average of the quarterly data to compute the expense ratio as a percentage of this average AUM.

This had to be done as the exact average AUM used in the annual report for regular and direct plans are not known.

HDFC-Top-200-Expense-Ratio

Notice that there is practically no discrepancy between the estimated and reported expense ratio. The amount of management fee charged is the same for direct and regular plans.

PPFAS Long Term Value Fund Expense Ratio Analysis

PPFAS is the second direct to investor mutual fund after quantum despite having a regular option! That could have been guessed from how eager they are to interact ‘directly’ with investors!

PPFAS-Long-Term-Value-Fund-Expense-Ratio

The trouble here is the presence of the two greyed entries. We have not seen that in any other annual report. Using that skews the expense ratio estimated significantly. So until there is more clarity on this, they have not been included in the total expense ratio.

If that is acceptable, there is no discrepancy between the estimate the value reported in the annual report. The management fees are also the same.

Franklin India Smaller Companies Fund Expense Ratio Analysis

This was considered in the above-mentioned post but not explored further. If we repeat the above calculation where the management fee is the same for regular and direct plans, there is a huge discrepancy in the direct plan expense ratio.

Franklin-Templeton-Smaller-Companies-Fund-Expense-Ratio

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However, Franklin has clearly mentioned in the annual report that the management fee as a percentage of AAUm is

1.33% of Regular plan AAUM and

0.7% of Direct plan AAuM.

There is a huge difference between how regular fund investors  and direct fund investors are charges. Yet another reason to get rid of regular plans. Well at least, for this (and such) fund(s)!!

If the calculation is repeated after taking into account this difference, the estimate is reasonable.

Franklin-Templeton-Smaller-Companies-Fund-Expense-Ratio-2

Why does Franklin provide such differential treatment? As a direct investor, I am happy to enjoy the huge difference between regular and direct plans returns in this fund, without bothering about  why. I think regular plan investors should question Franklin about it.

I think regular plan investors should question Franklin about it.

There is a view among the distributor community that regular plans “subsidise” direct plans. Clearly not for all funds and not in all AMCs as the above analysis shows.

Is this difference a really a subsidy or is it used for any other means in regular plans? Would great if someone from Franklin Templeton can clarify.

Please join me in thanking Balaji Swaminathan for this fantastic analysis of direct plan vs regular plan expense ratios.

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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7 Comments

  1. Excellent Article!!.

    SEBI brought in a guidelines stating all MF’s should have only one Plan under heads like ( Large Cap, MID Cap , Small, Tax , Multi Cap ) etc… This is a very appreciable Move!!!!!. Can you throw light on what’s the status on this & what’s the time frame for them to comply with SEBI dictum pl.

  2. Excellent analysis

    Please do this for Sundaram Select Mid Cap fund. There is hardly any difference in TER for Regular and Direct plan.

    Sundaram Mutual Fund AMC seems to be the most “direct investor” unfriendly company

  3. Direct plans of mutual funds have become a big hit due to low charges, but an uber low-cost instrument remains largely undiscovered by investors. The fund management charges of NPS Tier II plans are barely 1% of the cost of the average direct plan. A direct mutual fund charges 0.75-1.5%—or Rs 750-1,500 per year for managing an investment of Rs 1 lakh, compared with Rs 1,500-2,500 charged by a regular mutual fund. But NPS Tier II plans charge only 0.01%—or Rs 10 per year for managing an investment of Rs 1 lakh. The ultra-low costs mean higher returns for investors. Any comments ?

  4. Kushroo.. Excellent question.. This got me also thinking too as I never analyzed this AMC or its funds as I don’t have any investments with this fund house.. As a ‘Direct’ customer I would be worried too with regard to so low difference in Expense Ratio when the difference in the ER ratio in FY 2014-15 was significant. As I can’t paste any image on this comment I am sharing a link of my analysis.. Look at it and also read my observations.. Hope this helps

    https://www.dropbox.com/s/0216d7vql16dn6b/Analysis%20of%20Sundaram%20Select%20Midcap.xlsx?dl=0

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