Direct investment in MFS is not as cheap as you think

MUMBAI: Mutual fund firms raised fees for those who invested in mutual funds directly as they sought to offset revenue losses for having had to reduce charges in plans that were sold through distributors, circumventing the spirit of rules introduced by the markets regulator to reduce the cost of investing.

The Securities Exchange Board of India (Sebi) has now intervened to prevent the overcharging, after a study found that mutual fund firms had raised cost of investing in direct plans. In an October 22 circular, it directed mutual funds to ensure fees charged in direct plans under various heads do not exceed those charged by regular plans.

Direct mutual funds plans are typically 75 basis points (bps) cheaper than plans involving an intermediary. But the difference narrowed to 55-60 bps after the firms reduced charges in indirect plans and, simultaneously increased them for direct plans, two people with direct knowledge of the matter said, asking not to be identified. One basis point is 0.01%.

“The regulator has come to the conclusion based on an extensive study done by Sebi-appointed Mutual Fund Advisory Committee (MFAC). The panel in its report in August found that mutual fund companies increased the base total expense ratio (TER) of equity—direct plans by 15 bps,” said the first of the two people cited above. The objective of passing on the benefit of lower TER to investors is being circumvented, he added.

The 15 bps increase in direct plans is the same amount by which expenses were cut by Sebi in March, when it reduced a 20 bps charge allowed in lieu of exit load to 5 bps. A copy of the report has been reviewed by

Sebi barred mutual fund firms from using funds collected by imposing exit loads for their sales and marketing expenses in 2012. To compensate for the loss of revenue, Sebi had then allowed them to levy an additional 20 bps charge on investors towards meeting expenses.

However, the regulator, following an internal study, found that mutual fund firms had levied unfair charges which resulted in excess collections of ₹1,500 crore.

SEBI HAS INTERVENED TO END OVERCHARGING, AFTER IT FOUND THAT FIRMS HAD RAISED COST OF INVESTING IN DIRECT PLANS