MFs fail to move investors to direct plans, rapped

Sebi asks them to make good losses; fund houses say error not deliberate

Asset management companies (AMCs) have come under regulatory fire for lapses in moving investors from indirect plans to the more cost-effective direct plans. According to sources, the capital markets regulator Securities and Exchange Board of India (Sebi) has rapped 20 fund houses for delay in implementing client requests of migration to the cheaper direct plan of the same scheme.

Sebi has issued directive to the fund houses to make good the losses to investors, said a person with direct knowledge of the development.

Introduced last year, direct plans are for those investors who wish to invest directly in a mutual fund scheme without the help of a distributor or agent.

MIGRATION ISSUES

• Investors hit due to lapses at MFs in moving them to direct plans
• Sebi asks fund houses to compensate the investors
• Investors save up to 60 bps in direct plans as compared to indirect plans
• AMCs say lapses due to technical issues
• SIP investors mostly hit
• 4 per cent of equity AUM under direct plans

Direct plans have separate net asset values (NAV), which are typically higher than those of normal or indirect plans as investors save on commission fees.

Sebi is said to have written in its letter to the fund houses, "AMCs are directed to pay the interest component to the investors who were not given higher NAVs in spite of investing directly with the fund house."

Sources indicated the breaches had mostly affected the systematic investment plan (SIP) investors, specially those who had investments before the introduction of the direct plan initiative by Sebi in January 2013.

Meanwhile, the fund houses have maintained the delay in shifting customers to direct plans was unintentional and due to technical issues.

The chief executive of a fund house said, "The shifting plans, particularly for SIP investors, had put the back-end team of fund houses in  overdrive. We all tried to ensure a smooth transition. If at all there were instances of late introduction of direct plan, it was an error rather than purposeful foul play.”

He added most of the affected investors had made their SIP investments with a distributor code before the direct plans were introduced.

These breaches had come to light during the first quarter of this calendar year after Sebi had conducted a series of thematic investigations on mutual funds.

A source said, "There were clear instances where investors who had applied for a switch to the direct plan from regular plan were given an NAV of the regular plan."

According to the people, SIP investors were given normal plan NAVs for two months before the error was rectified by the fund houses.

The concept of direct plans was introduced by Sebi to help investors bypass distributors to save money. Equity mutual fund investors save up to 60 basis points by opting for direct plans over normal plans. Direct plans have been received well by the market, specially by debt investors. More than half of liquid fund assets under management (AUM) are with direct plans.

The AUM of equity funds under direct plans has tripled from Rs 2,700 crore in March 2013 to Rs 7,818 crore in March 2014, by CRISIL data. But the AUM of direct plans in equity funds still constitute a small percentage of the overall equity assets.

Of total equity assets of Rs 2 lakh crore as on March 2014, 96 per cent assets were managed by distributors, while four per cent, or Rs 7,818 crore, was via the direct plan route.