Mutual funds try to 'switch' off direct plans

Impose steep exit loads on existing investors moving to direct plans, whereas moving from a direct plan to a distributor-supported plan attracts no such fee

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 raised their exit loads in the run-up to the move to as high as three per cent for exits made within six months and so on. Some investors say these “exit loads” are against the spirit of the move by the Securities and Exchange Board of India (Sebi) 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.
 

AN INDIRECT STRIKE

• Sebi announced low-cost direct plans in August
• Each scheme to have plans with lower expense ratio, where investors get in on their own
• Move was to offset increase in expense ratio and other charges
• Schemes have announced rules for direct plans to begin from January 1
• Schemes to charge exit loads for switching to direct plans 
• Experts say new plan should have ‘unhindered’ entry

 

RECENT SPIKES IN EXIT LOADS
	Revised charges	Earlier charges
Up to 180 days	3%	1%
181-360 days	2%	1%
361-540 days	1%	Nil
Above 540 days	Nil

 Nil Source: Valueresearchonline.com
Based on changes made by some AMCs post-October

Dhruv Mehta, head of an eponymous advisory firm and president of Federation of Independent Financial Advisors (Fifa) said Sebi circulars are silent on the aspect of exit loads. “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 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 approved in the board meeting on August 17, says, “To incentivise direct investments, there should be a separate plan for direct investments, that is, not through any distributor, with a lower expense ratio and no commission to be paid from those plans.”

Devendra Nevgi, founder, Delta Global Partners, said, “If the direct plans are the future of the industry, as Sebi wants it to be, there should be unhindered entry for investors. Not only exit loads, there should not be any cost. If the access is not unhindered, then Sebi has to come into play.”

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.

“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.

Sanjay Sinha, founder of Citrus Advisors, said, “Fund houses might have incurred upfront charges on (acquiring) the assets, which they may be charging as exit loads now.”

Though under the new rules, the amount charged as exit load is credited to the scheme thereby benefitting the remaining shareholders, it acts as a deterrent for the investor planning to go direct. Further, even the exact saving on the direct plan is uncertain.

Sinha of Citrus Advisors said, “Fund houses have not given the expense ratio differentials between the direct plan and the existing plan in the addendums. So, it is not very clear what will be the impact on returns. Only after the people see the differentials, they may take a decision on moving to the direct plan.”

According to Sinha, if in the meantime, advisors play an active role in helping investors select the right schemes, they might be able to retain investors.

However, it is better for the investor to move to the direct plan in the long run, said advisors. Mehta said, “The move will benefit a small section of investors which believes in doing things on its own.”

Mehta added that distributors have their apprehensions. “But, now that the plan is here, they have to try and cope. Investors who are using advisors will continue to need those services.”