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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Fund Distribution and Channel Management Practices

A distributor's client invests Rs 5,00,000 in a Regular Plan and the scheme's total expense ratio is 2.00% a year, of which 0.80% is paid out as trail commission. A comparable Direct Plan has an expense ratio of 1.20%. Assuming the gross portfolio return before expenses is identical at 12% a year, what is the approximate difference in rupee returns over one year between the Direct and Regular Plans?

The difference is about Rs 4,000 a year. The Regular Plan's expense ratio of 2.00% exceeds the Direct Plan's 1.20% by 0.80%, which is the trail commission, and 0.80% of Rs 5,00,000 equals Rs 4,000 in lower return for the Regular Plan investor.

  1. ARs 4,000Correct
  2. BRs 6,000
  3. CRs 10,000
  4. DRs 2,500

Explanation

The expense gap equals the trail commission: 2.00% - 1.20% = 0.80%. 0.80% of Rs 5,00,000 = Rs 4,000. Rs 6,000 uses 1.20%, and Rs 10,000 uses the full 2.00%, both wrong bases.

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