Sebi mulls direct plans for AIFs, PMS to help investors save on expenses

The Securities and Exchange Board of India (Sebi) is toying with the idea of introducing direct plans for alternative investment funds (AIFs) and portfolio management schemes (PMS), three people familiar with the matter said. 

The move could help investors save on expenses and indirectly benefit family offices and independent advisors who rely predominantly on a fee-based model. Direct plans exclude the commission or fee paid to distributors, resulting in lower expenses and schemes with higher net asset values (NAVs). At present, only mutual funds (MFs) offer such plans. 

“A lot of clients and family offices are asking for direct plans,” said Siddhartha Rastogi, managing director, Ambit Asset Management, adding, “The regulator may first try to rationalise costs, by limiting or scraping upfront commission for PMS and AIFs. Direct plans could follow after that.” 

The minimum ticket size for investing in AIFs is currently Rs 1 crore and for that in PMS is Rs 25 lakh. Both PMS and AIFs typically charge a fixed as well as variable fee based on the performance. A portion of this is paid to distributors as commission. 

One of the domestic brokerages which also runs a PMS, for instance, charges a fixed fee of 0.75 per cent, or 0.5 per cent, every quarter, based on the average of beginning and ending NAV. There is an additional performance fee charged annually or on withdrawal based on the high watermark concept. 

Let’s assume an investor puts in Rs 1 crore into an AIF scheme that yields 10 per cent returns. If the investor saves 100 basis points (bps) on distributor commission, he could end up earning Rs 24.5 lakh more than a regular plan at the end of the tenth year, estimates suggest. Over a 15-year period, the earnings would go up by Rs 60.7 lakh. For savings of 200 bps, the direct plans would end up earning Rs 51.2 lakh and Rs 1.29 crore more at the end of the same periods. 

“The regulator is consulting relevant stakeholders as the move can have far-reaching ramifications on the industry,” said a senior official of a large multi-family office. “As present, distributors that can’t make money from MFs are turning to PMS and AIFs. Tomorrow, if all these categories are put on the same footing, it will give the much-needed impetus to advisors to go and charge a fee from their clients.”

A small section of mutual fund investors that consult Sebi-registered advisors for investment advice opt for direct plans while paying a fee to their advisors. Since a large section of AIF and PMS investors employ advisory services, going direct would make more sense.

“There is likely to be a lot of pushback from the industry. Going direct may jeopardise the business models of large distributors, including private banks, which rely on selling AIFs or PMS,” said an industry official. 

The regulator has recently floated draft proposals for portfolio managers that envisage raising the minimum ticket size to Rs 50 lakh, enhancing reporting standards, and greater supervision of distributors. One of the suggestions is to introduce an all-trail model to compensate distributors.

Investments in AIFs have grown 60 per cent to Rs 1.19 trillion in the past year, on the back of easing regulatory framework and increasing investment in the debt space. PMS assets have doubled in the past five years to over Rs 16 trillion. A large portion of this money is in discretionary schemes, wherein the portfolio manager manages the funds of each client based on his needs.

The share of direct plans for MFs as a percentage of overall equity assets stood at 15.2 per cent as on September 30, 2019.