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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Two equity funds have the same category and similar portfolios. Fund A has a Total Expense Ratio of 0.60% for its Direct plan and Fund B has 1.50% for its Regular plan. Assuming gross returns are the same, which statement is correct about the difference in investor returns?

The investor in Fund A earns about 0.90% a year more. The expense ratio is deducted from scheme assets and lowers NAV, so with equal gross returns the plan with the lower TER, 0.60% against 1.50%, delivers the higher net return.

  1. AFund B's investor earns about 0.90% a year more because it pays advisory commission
  2. BBoth investors earn identical net returns because expenses are borne by the AMC
  3. CFund A's investor earns about 0.90% a year more, since the expense ratio is deducted from the scheme's assetsCorrect
  4. DFund A's investor earns less because Direct plans have no fund manager

Explanation

The TER is charged to the scheme's assets and reduces NAV. With the same gross return, the lower-cost plan has a net return higher by the TER gap, 1.50% - 0.60% = 0.90% a year. Distribution commission is part of the higher Regular plan expense, not a benefit to the investor.

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