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Mutual fund (MF) houses might have to align savings on direct plans with the commissions they pay to distributors, following the Securities and Exchange Board of India (Sebi) questioning asset management companies (AMCs) on the discrepancy between the expense structures of direct and regular plans.
Typically, direct plans — in which an investor circumvents the distributor — are 40-70 basis points cheaper than regular plans (for which investors route the investment through intermediaries). Fund houses pay commission of 1.5 per cent, nearly half the schemes’ expense structure, to distributors.
Sebi wanted fund houses to rework this arrangement so that investors who approached them directly saved more, said people privy to the development. “The current differential in the expense structure between the plans don’t give the highest benefit to those investing directly. Sebi has discussed this issue with fund houses,” said a source.
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Many believe fund houses might not be passing on the higher benefits to direct investors to retain business coming through distributors. “It appears most fund houses are deliberately keeping the differential in expenses — and, therefore, returns — between direct and regular plans on the lower side. A major chunk of the sales of mutual funds is through distributors; making direct plans cheaper would antagonise them. And, by doing this, fund houses also get the added bonus of higher margins for themselves,” said Dhirendra Kumar, chief executive, Value Research, a mutual fund tracker.
Currently, less than a third of equity assets come under the direct route.
Fund houses say direct plans are meant to be cheaper, but there isn’t any prescription stating the savings have to be directly linked to distributor commissions. They add this discrepancy could be due to the lack of a formula in this regard.
They argue though there are no intermediary charges for direct plans, there are costs associated with these, which puts a burden on AMCs. “AMCs have to spend on executives who service investors coming through direct plans. Also, the savings on direct plans is amplified over the investment horizon,” said an official.
Sebi had introduced direct plans in 2012, as a cost-effective way of investing. As of June this year, the assets under management of equity schemes through the direct route stood at Rs 10,000 crore and grew in June quarter by 2,333 or 30 per cent.
Earlier this year, the market regulator had pulled up about 20 fund houses for lapses in moving investors to direct plans. The fund houses were seen being lax in implementing client requests of migration to cheaper direct plans under the same scheme. Sebi had asked these fund houses to make good the losses investors had incurred due to the delay. At the recent annual general meeting of the Association of Mutual Funds in India, Sebi chief U K Sinha had expressed discomfort on the high commissions paid by AMCs to distributors.
