Any customer will be bothered about the expenses she is being charged for a product. In the mutual fund industry, the issue of expenses has come to the fore once again with the Sebi board meeting decision on revised lower expenses. We will discuss here, the relevance of mutual fund expense ratios.
How to track?
After the Sebi Circular dated June 5, 2018, asset management companies (AMCs) prominently disclose the expense ratio on their websites, on a daily basis. Earlier, though AMCs were required to disclose it on their websites, it was not as prominent and the data was not as detailed. The data on the website can now be easily downloaded and the history can be tracked.
Earlier, there would be multiple plans in the same fund, based on the amount of money you put in. Expenses would be lower in the plan that required a bigger investment amount, called the institutional plan. In other words, it was a bulk purchase discount offered to large customers. Sebi has stopped this by allowing only one plan and uniformity of expenses for all customers. To that extent, today, there is no confusion over which expense you need to track for your purposes.
Though we said earlier that customers will be bothered about the expenses being charged on a product, in case of mutual funds, it is not as vital. Customers look mostly at returns and the NAV of the funds are declared after charging the expenses. Even if the expenses of a fund are relatively higher than similar funds but the performance is good, the customer should be happy. On the other hand, if you compare expenses of funds in a category, across AMCs, and go for the lower expense funds, you may not be the gainer if the fund does not perform well. You may be paying relatively lower to the AMC but ultimately you end up with lower returns in your hand.
The relevance comes in, in the context of comparison between regular and direct plans. By going direct, you are saving on the expenses and to gauge that you have to compare between the two. By doing it yourself, i.e., not going through a mutual fund distributor, you are saving on your costs. However, there is a cost to everything and there is a cost of saving costs as well. You are giving up on the guidance of the intermediary, the execution (in direct plan you have to execute investments yourself) and the portfolio tracking / reporting. Net-net, when you have decided to go direct, you track the data on expenses and form a perspective on how much you are saving.
About the expenses
The nature of the expenses charged in mutual funds is recurring. For comparison purposes, against other recurring-expense-based financial products like insurance or Portfolio Management Services (PMS), expenses in mutual fund industry are relatively lower and hence beneficial to customers to that extent. Level of transparency, i.e., disclosure of expenses, is also better in mutual funds over insurance or PMS. If you want expenses lower than mutual funds, you have to go for direct execution, i.e., purchase of shares or bonds directly, where you have to pay brokerage per transaction.
As and when the Sebi circular comes out, following the board meeting, the revised expense ratios will be implemented. To be noted, the expenses of your fund will come down from what it is currently, only if it is higher than the permissible limit. If the AMC is charging something lower than the limit, there is no obligation to bring it down further, apart from competitive reasons.