A Welcome Move By Franklin Templeton
A journey of 1000 miles begins with a single step. The recent step taken by Franklin Templeton India, one of the largest asset management companies (AMC) in India, will help mutual fund investors to earn more on their investments. The fund house has abolished exit loads charged to investors switching from regular to direct plans of its open-ended funds. As regular plans have higher expense ratio, they earn lesser than the direct plans. In the short term, the difference between the returns may not be substantial, but in long run, say 10-15 years, the difference may be sizeable.
Earlier, if you wanted to shift from a 'regular' plan to 'direct' plan, you had to pay exit load, which acted as an obstacle for many investors. This exit load is normally charged as certain percentage on your investment amount if you exit from the fund before a defined period. The waiver is only for exit load and not the taxes that you need to pay.
This move will help more investors to shift towards direct plans. Despite the regulator directing fund houses to offer direct plan of each fund from year 2013, the investments through direct plans have not seen any substantial jump. They still form less than 20 per cent of total investments. If other fund houses too follow suit, we may see the proportion of investment in direct plans going up in the coming years. This will have two significant implications. First, it will generate higher returns for the investors and put more money in investors' pockets. This may attract more investors towards mutual fund investment. The second implication is that it will adversely impact the mutual fund distributors, who were earning commission by selling 'regular' plans of the fund. Switching towards 'direct plan' will impact their earnings.
I believe that it will be good for the entire mutual fund industry to follow the initiative taken by Franklin Templeton India as it will force all the fund houses to strengthen their product offerings to create better investment experience for investors and generate wealth for them.