Will mandatory disclosure of direct and regular mutual fund expenses help investors?

Investments under direct plan of a mutual fund scheme, which was introduced vide circular dated September 13, 2012.

Capital markets regulator Securities and Exchange Board of India (SEBI) has mandated that mutual fund houses must make separate disclosures of total recurring expenses for direct and regular plans, in a move that is expected to bring more transparency on how fund management fees are charged from investors.

Investments under the direct plan of a mutual fund scheme,  introduced vide circular dated September 13, 2012 and in effect from January 1, 2013, are investments which are not routed through distributors of mutual funds.

As distribution expenses and commission cannot be charged to investors of a direct plan, the expense ratio of direct plan of any scheme is lower than that of the regular plan of the same scheme and hence the returns of the direct and regular plans also differ.

According to the regulator, returns during the half-year and compounded annualised yields respectively shall be separately disclosed for direct and regular plans.

According to experts, disclosures on direct plans is a good step for investors.

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“Investors often overlook the impact of expense ratios on their returns. For instance, a Rs 10 lakh investment over 20 years in a direct mutual fund plan, with an expense ratio of 0.5 percent, could grow to approximately Rs 67.3 lakh. In contrast, the same investment in a regular plan with a 1.5 percent expense ratio might yield around Rs 58.1 lakh — a difference of over Rs 9 lakh. This disparity arises from higher fees paid to intermediaries, which many investors remain unaware of. This shift toward transparency is essential for a healthier investment ecosystem, allowing investors to retain more of their hard-earned money,” said Mohit Bhandari, Co-founder & CEO, Stratzy, an investment advisory platform,

A mutual fund distributor on condition of anonymity said, “Most investors, while (they) know the difference between direct and regular mutual funds plans are unsure how the direct plan expense is calculated. These disclosures will make fund houses  more transparent.”

When introducing direct plans in 2013, the capital market regulator had said that if an investor wants to invest directly with the fund house, and doesn’t want to avail of a distributor’s services, she shouldn’t pay distributor fees.

That gave birth to the direct plan; an identical plan of a mutual fund scheme, but without the distributor fees.

Everything else about the scheme -- the investment cost other than distributor commission, portfolios, taxation status, risk profile-remained the same. SEBI mandated that all schemes  must launch a direct plan.

To be sure, many asset management companies, mutual fund research platforms and media organisations already provide separate information on direct and regular plans, including expense ratios.

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“There is no confusion between direct and regular plans unless the investor is confused or not aware. The difference between plans is very transparent and clear,” said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.

However, Desai feels that the expense ratio is only one part of an investment.

“Expense ratios differ from product to product and asset classes as well. The expense ratio is important but should not be at the top of the priority list. Investors who understand how to go about investing can use the direct route. However, investors who don't understand and who require handholding, can come to distributors, which offer regular plans,” he said.

Experts say that for a certain set of investors, handholding is a very essential thing, as they don't feel confident enough about taking action around investment on their own.

Some experts also feel concerned that there’s too much focus on the cost of a fund.

“Maybe as a regulator, they are concerned about somebody overcharging investors. The point is there’s too much focus on the cost. This obsession and incessant focus on costs (and returns) is detracting investors from what is truly important. Getting their portfolio right in line with their goals, life situation, risk profile and other specific aspects is what is truly important. So good intentions sometimes lead to unintended consequences. SEBI should instead focus more on ways to get the investors making their investments in the right assets and schemes,” said Suresh Sadagopan, Managing Director and Principal Officer, Ladder7 Wealth Planners.

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The choice between direct and regular mutual funds depends on an individual's investment goals, knowledge, preferences, and the level of involvement they want in managing investments. It's essential to assess circumstances and objectives before deciding which type of mutual fund is right for you.