Mutual Fund Expense Ratios – Direct vs Regular
The table below will help you compare expense ratios of direct and regular plans of mutual funds, organized by category. You get two takeaways from this data: one, the differential between the direct and regular plan expense ratio for each fund plus the average direct-regular difference for the category. Two, where the fund’s expense ratio stands vis-a-vis its category average and individual peers. This data helps you understand how much you lose in each category by investing through regular plans.
The expense ratio is for the previous month. Data on expense ratio for a given month becomes available only after the second half of the following month. Data is updated based on AMCs’ declaration of the same in their monthly disclosures. Please note that expense ratios for some funds may not be available.
How to use this data
- The ‘Difference’ column tells you how much more expensive a fund’s regular plan is compared to the direct plan. For funds that pay more as distribution and commission expenses, the regular plan may be much more expensive than the direct. Larger the difference between direct and regular, the more the expense ratio will impact your return if you hold the regular plan. For these funds, consider investing through the direct route.
- You can also compare the ‘ Difference’ given for each fund against the average regular-direct difference given for the category. This will help you understand whether the fund is paying much more for distribution than peers do. When the direct-regular expense difference for the fund is much more than what it is for the category, it suggests that your fund is charging unusually more on the regular plan. For these funds, consider investing through the direct route.
- The Category Average data tells you the average expense ratio for the category in direct plans and regular plans. Use this to check whether your fund is much more expensive than peers or is lower-cost.
- Run a check on returns for your funds if the expense ratio is high. While some higher expense ratio is fine, a very high deviation from the average calls for a closer look at fund performance, especially in debt funds. If this high expense comes with lower return, it’s a red flag. Funds with lower AUMs are allowed to charge higher expenses, so an additional check on AUM if performance is satisfactory can also explain the higher expense ratio.
- Don’t go by expense ratio alone to decide whether you should invest in a fund. Low expense can also come with low return, and vice versa. Use this data to know how much more your fund charges on its regular plan and whether this deviates significantly from what its peers do.
This data is not to be considered as our opinion on whether you should go for direct or regular plans. Also, your individual tax status and tax outgo while deciding to switch from regular to direct needs to be considered.
Check our MF Review Tool for our buy/sell/hold calls and for funds where we have given ‘Buy through Direct’ calls.
What are the SEBI expense ratio limits?
SEBI regulates mutual fund expense ratios in two ways. One, SEBI specifies the maximum that each category of funds can charge. Two, SEBI defines caps based on the assets under management (AUM) of the fund as well. Expense ratios decline as a fund grows in size. The table below gives the category-wise ceiling on expense ratios.
Please note that the charges are on a slab basis. For example, for an equity fund with an AUM of Rs 4000 crore, here’s how the expense ratio is worked out: the first Rs 500 crore will be charged 2.25%, the next Rs 250 crores – 2.00%, the next Rs 1,250 crores – 1.75%, and the final Rs 2, 000 crores – 1.6%. The weighted average of these comes to 1.752%.
Please also note that a fund’s NAV and therefore returns are after factoring in expense ratio. The returns and NAV you see are not further subject to any deductions due to expenses.
What goes into an expense ratio?
A fund specifies just one number for the expense ratio, or the technical name for it – the Total Expense Ratio (TER). Most expenses that is absorbed in the TER are as follows:
- Fund management costs
- Brokerage expenses incurred to conduct trades in the portfolios
- Registrar and Transfer expenses
- Custodial expenses
- Marketing expenses
- Business expenses (rents, branches, infrastructure etc)
- Servicing costs such as providing services like account statements or other documentation
- Commission paid to distributors if it is a regular plan
Misconceptions about expense ratios
- They are charged when you redeem: No, they are not. They are charged on an everyday basis before the NAV is declared.
- You should subtract expenses to calculate returns: No. All mutual fund NAVs and therefore returns are calculated after considering expense ratios. The return you see is the return you get.
- Expense gets charged only when the scheme does well: No. Regardless of whether the scheme is moving up or down, the expense ratio keeps getting charged.
- Expense ratio is a fixed percentage: Not true. Expenses are charged to the scheme based on actual charges incurred by the AMC, subject to SEBI set limits, and could vary over a period of time. What you see as the expense ratio is the number for a particular past period of time. Like performance, past numbers will not always be future numbers.
