So I see that its the expense ratio that makes all the difference between a direct and indirect plan. For direct plans the ratio is definitely lesser compared to regular ones. But even for direct plans the ratio does exit. I mean its not completely zero. So where does this expense go? If nothing is going to the middle broker man. And nothing is being charged by the AMC then why does that little expense ratio even exist?
Every fund has to bear certain expense when it comes to managing your funds and expense ratio is deducted from your investments to cover that. Managing a fund involves costs like management fee, promotional expenses, operating costs, registrar fees etc.
The reason why a regular fund has a higher expense ratio is because it has to pay commissions to distributors and you will be charged to cover that.
Expense like what ?, for Direct Funds.
Mutual fund is a business, so the expense ratio what you see on direct is what they earn for managing money. Like any business, their costs will include - salaries, technology, marketing, etc.
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Shouldn’t they be charging only if they make money to investors? Aren’t the fund collected as expenses are far too higher than actual expenses incurred? Isn’t competition not bridging down the expense ratio costs for investors? Or, there is cartelization ?
In my opinion, there shouldn’t be any expense ratio at all for direct plans. We are ultimately giving a company money to grow, hence it should incur all the related expenses out from the profit it generates from the invested money, and should not just cut a part of the investment in the name of “maintenance cost or operating cost etc.”
May be its all just the game of competition and having proper mass awareness that brings the change in the society. Just a few months ago, I ( and I suppose many other like me ) did not know about the extra money charged in Regular Funds. Or even we knew, we did not have the platform that offered us direct plans. But awareness and competition has given us a chance to by pass this loophole today.
May be in near future we will see companies offering direct plans with literally 0 expense ratio. I think implementing such an investment product in near future is not a matter of IF but When.
Yes I agree with you that expense ratio is absurdly very high for the expense that may have occurred for the maintenance of the fund. But it can never be zero, I mean how it can, we put money, they invest that money in equities or debt funds and the person who invests on behalf of us (The fund manager) needs salary by the AMC. I mean its a business they earn through expense ratio. A better choice may be invest in @smallcase though it is not alternative of Mutual Fund but you have to pay only once of a token fee Rs. 100 for lifetime.
ETFs are supposed to be better and low-cost alternatives. The expense ratios in ETFs are as low as 0.20%.
But questions remain about their suitability in India even though there is a huge shift to passive investing in developed markets. Recently the CEO of MOSL AMC called their ETF business a deviation.
Another deviation is the ETF business, although we are not growing it. As of now, we have no offer document pending. The only remote possibility is maybe a small-cap fund, which is a gap in our offering. But now is not the right time.
Judging by this ETFs in India have a long way to go.
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This may give you some insight