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Distributors and AMCs to hammer out ‘direct’ plan

FIFA calls for a meeting of all AMCs chiefs on 8 Nov

In a move to closely assess the pulse of the 7.2 trillion Indian mutual funds (MF) industry on “direct" plans, the Foundation of Independent Financial Advisors (FIFA), a Mumbai-based distributor association, has called for a meeting of the chiefs of all the asset management companies (AMCs) on 8 November. At the time of going to press about 20 AMCs have confirmed to attend. The introduction of a “direct" plan has sent MF distributors in a tizzy.

In a circular dated 13 September, the capital market regulator, Securities and Exchange Board of India (Sebi) said that every MF scheme must have a direct plan, which investors can buy without any agent’s help, effective 1 January 2013. “We have called for an open forum with the heads of all fund houses and our distributor association members so that there is a cross-section of opinions aired there. It gives us an opportunity to know where fund houses stand," says Dhruv Mehta, chairman, FIFA.

As per Sebi’s instruction, the “direct" plan will have a slightly lower expense ratio as the distributor expenses would not be embedded in it, unlike the normal plan. The direct plan will also have a different net asset value. Typically, while AMCs pay upfront charges to distributors from their own pockets, they pay the trail fees (for as long as the investor stays invested in the scheme) out of the total expense ratio (2.5% is the upper limit at present) fund houses charge you, the investor. Sebi thinks that if investors avoid distributors, they should not pay the agent charges.

But distributors feel that the direct plan will lure investors away from them. They believe that investors may take advice from distributors for about, say, 20% of their portfolio and then replicate the advice for the remaining. “In foreign countries, MF schemes offered under ‘direct investment’ mode are different from those offered through distributors. Here, the same scheme must have a direct and a normal plan," says Mehta, adding that Sebi’s other move to allow only one option in all schemes compared with the erstwhile “retail", “institutional" and “super-institutional" plans is “contradictory" to Sebi’s direct plan move.

FIFA is not the only entity worried about the impact of the direct plan. Surajit Misra, national head (mutual funds), Bajaj Capital Ltd, one of India’s largest MF distributors, feels that there is “quite a lot" of apprehension in the distribution community about the direct plan. “If financial advisers—who charge their clients—are allowed to buy the direct plan on behalf of their investors, the investors can benefit because they, then, pay only to their advisers and not much to fund houses," says Misra, who thinks that distributors weren’t kept in the loop when this measure was being deliberated upon.

But isn’t the “direct" plan meant for investors who wish to invest directly? “I believe that every investor needs an adviser. Even savvy foreign institutional investors and high networth individuals take help of research reports and advice that top equity research outfits come out with," says Misra.

Mehta claims that the meeting is not meant to mobilize opinion, signatures or voices. “The forum is just to give distributors a chance to collectively hear what all AMCs think of the direct plan and where they stand," he says. One of the outcomes may be that FIFA may request for a meeting with Sebi, but Mehta says that nothing has been decided. “The meeting is just to discuss, collectively," he says. “Don’t put too much into it. It is just like any other normal meeting that fund houses have with their distributors, regularly," says Sundeep Sikka, chief executive of Reliance Capital Asset Management Co. Ltd.

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