The retail investor is not adequately informed about how much he stands to gain by eliminating the distributor.
It is frustrating to see well-intentioned reforms by Indian regulators so easily stymied by red tape or vested interests. The Securities and Exchange Board of India’s (SEBI) new rule which requires all mutual funds to offer a low-cost ‘direct plan’ to investors seems to have met this fate. Two weeks after fund houses dutifully launched these plans, most retail investors are still in the dark about how they work. Instead, institutional investors are making the switch and pocketing the savings.
The argument for direct plans is sound and straightforward — not all mutual fund investors use the services of an agent, and if they don’t, it is unfair that they be charged an annual fee towards the fund’s distribution expenses. Before this rule, funds typically charged a distribution fee of 0.30 to 0.50 per cent a year (on occasion higher), which came out of the net asset value. In a September 2012 directive, SEBI asked funds to stop this practice and by January 1, 2013, open a separate commission-free window for direct investors. It has been three months since this announcement and its rollout, but retail investors still appear to be confused about these plans. The reason for this is clear. Very little by way of communication about the impending change -- or its benefits -- has gone out to retail investors. One cannot expect fund distributors to apprise investors of the change, given that this move strikes directly at their revenues. But it is certainly difficult to understand why fund houses have failed to do this either. All mutual funds have done is to put out statutory advertisements. These are couched in dense legalese, and don’t quantify exactly how much an investor stands to save by going ‘direct’. This reluctance suggests that fund houses value the goodwill of their distributors much more than their investors. SEBI should step in and immediately mandate these disclosures from mutual funds. It can also undertake its own investor education initiative on the new direct plans.
Even such communication, however, may not immediately prompt retail investors to queue up for the direct plans or indeed mutual funds. For one, while direct plans save costs for the investor, they are far from convenient because they entail dealing individually with multiple fund houses. This, in turn, is because mutual funds, unlike stocks, do not share any common platform where investors may transact and monitor their investments. Nor is the move likely to woo retail investors away from other modes of savings. Given that mutual funds have scarcely gone beyond the top cities or affluent investors, most lay investors require the services of a distributor to select the right products, complete the transaction and monitor their portfolios. Therefore, this disintermediation move will at best help the small population of seasoned investors. The task of channelling household savings into mutual funds can only be accomplished the hard way -- through policies that incentivise funds to invest in physical infrastructure.
Keywords: SEBI, mutual funds, low-cost ‘direct plan’, retail investors, institutional investors, making switch, pocketing the savings, mutual funds investment
Comments:
DIRECTinvesting is definitely benificial to investors. However this is creating one more account of the same scheme for all those existing MF investors.For example if I had invested in 5 schemes before JAN13(ONLINE DIRECT),making additional purchases in the same schemes is creating another 5 acconts.
TO avoid confusion,it may be better to ask the investors who wish to go through AGENTS to pay commission directly without involving the MF.
Thisway MFs would have only one NAV for a scheme&one acconnt and Investor would be aware of the extra money he is paying.A time will come & They will switch to DIRECT INVESTING.
The benefit of SEBI's new rule of requiring all mutual funds to offer the low cost 'direct plan' not percolating down to the ultimate investors either due to redtapism or due to role played by the fund houses with vested interests,as you have mentioned, is indeed a matter of concern. This is aggravated more because the investors get less or no exposure to the huge investment opportunities around, leave alone the mutual fund sector or its correctional policies announced from time to time. Against the backdrop of low penetration of mutual fund in our country (Indian investors' participation has been less than 4% only),education among investors are all the more necessary. As it is in the domain of a judicious decision-making process of an individual like other investment propositions, there is a need for creating a strong awareness among potential investors in mutual funds even at the furthest corner of the country where huge idle funds are lying for productive investment purpose.
Sir, HDFC Mutual Fund have updated their official web site with expense
ratios applicable on the "Regular" plans and by how much the "Direct"
plan saves in that expense. There's a clear benefit of at least 0.1%
all the way upto 0.7% for "Direct" investments.
KT Rao makes a good point. If SEBI thinks direct investments are good,
they should completely abolish two NAV system and keep only one NAV, no
agent commission should be paid by Mutual funds. Let the investors pay
the service to the agents for buying funds. This will make a level
playing field for distributors. Only those who do a good job will get
paid more. Why all MF agents should get same commission regardless of
their quality of service ?
- RRK Advisory
If SEBI thinks direct investments are good, they should completely
abolish two NAV system and keep only one NAV, no agent commission should
be paid by Mutual funds. Let the investors pay the service to the agents
for buying funds. This will make a level playing field for distributors.
Only those who do a good job will get paid more. Why all MF agents
should get same commission regardless of their quality of service ?
It would be better if SEBI abolishes the any expenses charged by the Mutual Fund companies,rather investor should pay only when they will get return.
In order to help those investors who want to invest in DIRECT PLANS
SEBI/AMFI should quickly operationalise the MUTUAL FUND UTILITY
organization where an investor can make transactions relating to any MF
by visiting one place instead of visiting several MF offices.
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