Mumbai: Asset management companies (AMCs) raised fees for those who invested in direct mutual fund plans as they sought to offset revenue losses for having had to reduce charges in regular mutual fund plans that were sold through distributors, circumventing the spirit of rules introduced by the markets regulator to reduce the cost of investing.
Direct investment in mutual funds is not as cheap as you think
The Securities Exchange Board of India (Sebi) has now intervened to prevent the overcharging, after a study found that AMCs had raised the cost of investing in direct plans. In a 22 October circular, it directed AMCs to ensure fees charged for direct mutual fund plans under various heads do not exceed those charged for regular plans.
Direct mutual fund plans are typically 75 basis points (bps) cheaper than those involving an intermediary. But the difference narrowed to 55-60 bps after AMCs reduced charges for indirect plans and simultaneously increased them for direct plans, two people with direct knowledge of the matter said, asking not to be identified.
One basis point is one-hundredth of a percentage point.
The popularity of direct mutual fund plans, introduced in 2012, surged in the past six years because of lower costs, with 41% of total assets under management (AUM) with Indian mutual funds having been invested directly as of March 2018.
“The regulator has come to the conclusion based on an extensive study done by Sebi-appointed Mutual Fund Advisory Committee (MFAC). The panel in its report in August found that AMCs increased the base total expense ratio(TER) of equity-direct plans by 15 bps,” said the first of the two people cited earlier. The objective of passing on the benefit of lower TER to investors is being circumvented, the person added.
The 15 bps increase in direct plans is the same amount by which expenses were cut by Sebi in March, when it reduced a 20 bps charge allowed in lieu of an exit load to 5 bps.
A copy of the report has been reviewed by Mint. An email sent to Sebi seeking comment was not answered.
Sebi barred mutual funds from using funds collected by imposing exit loads for their sales and marketing expenses in 2012. To compensate for the loss of revenue, Sebi then allowed them to levy an additional 20 bps charge on investors towards meeting expenses.
However, following an internal study, the regulator found that AMCs had levied unfair charges, which resulted in excess collections of ₹1,500 crore.
“This is the second case of AMCs not following the rule in spirit and the idea of direct plans is being negated,” said the second of the two people cited earlier. “With the way some AMCs have increased charges, direct plan investors are paying for the upfront commission or upfronting of trail commission being paid to distributors.”
Reduction of mutual fund fees to 5 bps had led to a drop in revenues for AMCs. Most of the decline was passed on to distributors but even here, it was not done uniformly, the MFAC study noted.
“Banking channels, corporate distributors’ commissions remained untouched,” said the MFAC in its report.