Millions of mutual fund investors are being discouraged from opting for investments through a direct plan, which will take effect tomorrow as fund companies have imposed steep charges on moving from existing plans to the new direct plans.
These charges are in the form of exit load, which the funds have said they will charge, if the investors want to “switch” their existing investments to the direct plan.
Incidentally, many funds had hiked their exit loads in the run up to the move to as high as 3% for exits made within six months and so on. Some investors say these “exit loads” are against the spirit of the Sebi move as there is no actual exit.
Further, there was no direction about charges for switching from the existing plan to direct plan in the Sebi documents.
In August, Sebi decided in its board meet that funds will introduce low-cost direct plans which will not impose marketing and selling charges on the investor.
The memorandum submitted by the mutual fund advisory committee and was approved in the board meeting on August 17, says “To incentivize direct investments, there should be a separate plan for direct investments i.e. not through any distributor, with a lower expense ratio and no commission to be paid from those plans.”
Dhruv Mehta of an eponymous advisory firm and president of Federation of independent Financial Advisors (FIFA) said Sebi circulars are silent on this aspect. “Each fund house is taking its own call. I don’t think there was any Sebi directive on charges for switching to the direct plan,” Mehta said.
In a ridiculous directive some funds have even said switches from existing (distributor- supported) plans to direct plans will attract exit loads, whereas the reverse – switch from direct plan to existing plan will not attract such charges.
"Switch of investments from existing plan (whether the investments were made before or after effective date) to direct plan shall be subject to applicable exit load, if any. However, no exit load shall be levied in case of switches from direct plan to existing plan," a notice cum addendum published by one of the top-five fund houses said.
“How can one be considered an exit and the other not? Thus it is very clear that whose interest the fund companies are aligned to. They want to protect the distributor at the expense of the investor,” said a Mumbai-based mutual fund investor.
However, it is better for the investor to move to the direct plan in the long run, said advisors.