Recently, while reviewing a fact sheet of a short-term debt mutual fund with its manager, one detail caught my attention — the expense ratio.
The expense ratio represents the operating costs charged by a mutual fund for managing investors’ money. It includes fund management fees, operating expenses, and brokerage paid to distributors.
In this particular scheme, the Direct Option (without intermediaries) carried an expense ratio of just 0.11% p.a., while the Regular Option (through distributors/brokers) stood at 1.01% p.a. — a difference of 0.90% p.a. on a product delivering barely 6–6.5% returns. That difference largely reflects the brokerage received by the distributor.
On probing further, we discovered that many mutual fund distributors often recommend products not for their suitability, but for the higher commissions they generate. Consequently, product manufacturers sometimes design offerings that serve distributors’ profits rather than investors’ needs.
Smaller fund houses — with higher permissible expense ratios due to lower asset bases — can afford to pay even higher commissions, leading some distributors to push more of their schemes. In some cases, the difference in expense ratios and payouts can be as high as 2% p.a.
So why don’t investors question this? Why not work with a fee-only financial adviser who separates advice from product distribution? Why are there still so few SEBI-Registered Investment Advisers (RIAs) in India?
The answer lies in visibility.
With distributors, brokerage and commissions are embedded — invisible within the product. The same happens with insurance agents who push savings-linked insurance policies for higher commissions rather than simple term plans.
In contrast, a fee-only adviser is transparent. Every rupee of cost is visible. Yet many investors hesitate to pay an explicit advisory fee, even though it often works out cheaper and more aligned in the long run.
Recently, we quoted a prospective client ₹5 lakh p.a. (0.5% p.a.) as an advisory fee on a ₹10 crore portfolio. He was uncomfortable and preferred the “no-fee” regular route — where our embedded earnings would have been roughly ₹10 lakh p.a. We let the client go.
It hurt — because transparency often costs us business — but our commitment to being a fee-only financial planning firm remains non-negotiable.
But remember – There’s no such thing as a free lunch.
Ask questions. Stay aware. Because at the end of the day, it’s your hard-earned money.
Naveen Julian Rego – CFP®
MD & Principal Officer
Date: 15-10-2025
Note and disclaimers:
- Investment in the securities market is subject to market risks. Read all the related documents carefully before investing.
- Registration granted by SEBI, membership of BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
- Financial products recommended by us which are under the jurisdiction of other regulators are beyond the scope of SEBI’s grievance mechanism.