SEBI Chief Warns Against Additional Charges In Direct Plans
Direct plans allow investors to invest in mutual fund schemes without routing the money through any agent.
The Securities and Exchange Board of India warned mutual funds for charging under various heads and defeating the very purpose of direct plans.
“We have observed during our inspections of mutual funds that the difference in the TER (total expense ratio) between direct and regular plans is not exactly to the extent of distribution expenses and commission paid,” SEBI Chairman Ajay Tyagi said at the Association of Mutual Funds in India’s Members Summit in Mumbai—the market regulator uploaded the speech on its website. Such practices, he said, are not desirable and defeat the very purpose of direct plans.
Direct plans allow investors to invest in mutual fund schemes without routing the money through any distributor or agent.
To prevent misuse by fund houses which charge additional expenses under other heads, the regulator recently specified that all fees and expenses in a direct plan in percentage terms under various heads including the investment and advisory fee shall not exceed the fees charged under such heads in a regular plan.
“The numbers I am seeing with respect to direct plans are not very encouraging,” Tyagi said.
The regulator also expressed disappointment over the awareness about exchange-traded funds. “Not much progress has been made in encouraging investments in ETFs,” he said, adding that use of technology can play a important role in raising awareness about both direct plans by mutual funds and ETFs.
The quest for higher yield has led to the industry indulging in risky investment, exposing the fault lines, Tyagi said. “There is a clear distinction between lending and investing. A mutual fund’s investment strategy needs to have required elements of safety as well as returns,” he said. “While making an investment, the mutual funds have to necessarily take into account their mandate and organisational structure.”
Mutual funds do not have risk capital and are essentially pass-through vehicles wherein net asset value ought to reflect the correct value of assets held at any time, Tyagi said. This, he said, is an important aspect which mutual funds should keep in mind while making debt investments.
Nearly a year after defaults by IL&FS group, the assets under management of open-ended debt funds is yet to reach the AUM levels at the end of August 2018.