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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Mutual Funds

Mr. Iyer, 45, wants to invest in an equity-oriented mutual fund. He asks why the Total Expense Ratio (TER) of a Direct Plan is lower than that of a Regular Plan of the same scheme. What is the correct explanation?

A Direct Plan has a lower TER because it carries no distribution commission, as units are bought directly from the fund house without an intermediary. The portfolio and fund manager are the same as the Regular Plan, so the difference lies only in costs.

  1. ADirect Plan has no distribution commission included in its expensesCorrect
  2. BDirect Plan invests in lower-risk securities than Regular Plan
  3. CDirect Plan has a separate portfolio managed by a different fund manager
  4. DDirect Plan is exempt from the SEBI TER limits

Explanation

Both plans share the same portfolio and fund manager. A Direct Plan is bought without a distributor, so no distribution commission is charged, resulting in a lower TER and higher NAV. TER limits apply to both plans.

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