Someone is sitting in the shade today because someone planted a tree long time ago.Last time I wrote about how SEBI is making multiple changes to the investing framework to make investing more transparent and equitable for retail investors. I also bemoaned the general apathy of the retail investing community towards these changes which is the single biggest reason why these changes are not yet making the desired impact. It turns out however that the apathy of the investing community is so taken for granted by the AMCs that some of them have actually been taking rampant advantage of their ignorance and indifference to favor the distribution community, much to the displeasure of SEBI and definitely in contrary to the spirit of the SEBI guidelines. Here is how investors have been taken for a ride by these AMCs.
Remember how SEBI mandated AMCs to introduce direct plans in all schemes for the benefit of the retail investor who wanted to avoid distributor commissions. This was a very welcome move by SEBI intended to reduce the cost of investing for savvy investors or those who took the services of an advisor. Considering that AMCs pay between 75 to 125 bps as commission to distributors, the TER (total Expense ratio) of direct plans was expected to reduce in the same proportion compared to regular plans. However, would you believe that AMCs actually raised the fees in direct plans to compensate for revenue losses that they incurred in regular plans for having to reduce charges in those plans due to ceiling guidelines? Many leading business newspapers have reported on this prevailing malpractice which you may read on these links – Economic Times, Live Mint and Business Standard. This is a clear case of favoring distributors over investors by AMCs and a violation of their fiduciary responsibilities towards their Customers. It also contravenes the spirit of the ‘Mutual Fund Sahi Hai’ campaign that the MF industry has been promoting diligently for so long now.
Well, the good news is that this malpractice is set to end soon. Taking note of this malaise SEBI’s circular on transparency in TER of mutual fund schemes has directed that the difference between the TER of a direct plan and a regular plan should at least be equal to the distributor commission. In effect, it means that expenses towards distributor commissions should be booked in regular plans only – they cannot be booked in the direct plans. This guideline is expected to reduce the TER of direct plans in the coming months and investors should start getting notified about these changes from AMCs starting Jan 1 2019.
What to Do
This is yet another opportunity for investors to increase their returns from Mutual Funds by making the switch from Regular plans to Direct plans. The best way to do this is however is to review your financial goals with the help of a financial advisor and plan the switch in a manner that can best address those goals. A SEBI Registered Investment Adviser is best qualified to help you in this process.
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