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

Two large-cap equity funds have the same objective. Fund A has a Total Expense Ratio of 0.60% in its direct plan, while Fund B has 1.50% in its regular plan. Which statement is the most accurate for scheme comparison?

Compare schemes within the same plan type, because the regular plan's higher TER partly reflects distributor commission that the direct plan does not carry. TER is already reflected in NAV, and a higher cost does not ensure better performance.

  1. AFund B must outperform because higher cost means better management
  2. BThe expense difference is partly explained by distribution commission in the regular plan, so comparisons should use the same plan typeCorrect
  3. CTER is charged to the investor separately and not reflected in NAV
  4. DDirect plans always give lower returns because they have no distributor support

Explanation

Regular plans include distribution commission in TER, so they cost more than direct plans. Fair comparison needs the same plan type. TER is deducted from the scheme's assets and is reflected in NAV; higher cost does not imply better performance.

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