As many of you may be aware that beginning this year (i.e. from January 01, 2013), the Securities Exchange and Board of India (SEBI) made it mandatory for mutual fund houses to provide direct plans for their existing and new schemes, and directed that a separate NAV thereto should be disclosed. We also wrote how opting for "direct plans" offered by mutual funds could help you enhance your returns. We said that an extra mile covered could earn an extra buck!

But later in the past few weeks some mutual fund houses imposed exit loads for existing investors who wished to move on from their existing plan (i.e. distributor supported) to "direct plans" (which are effective from January 01, 2013); but conversely didn't levy an exit load if one wants to shift from a "direct plan" to an existing / standard plan (which is distributor supported). It is noteworthy that exit loads as high as 3% for exits / switches made within six months are imposed by mutual fund houses for moving to direct plans (from existing / standard plans).

And now further dampening the spirit of investing in "direct plans", the Association of Mutual Funds in India (AMFI) has put in an extra condition (which is restrictive in nature) on its members (who are mutual fund houses). In a recent note, the industry body wrote to its members asking them not to share data feeds of direct plans with mutual fund advisors. They (AMFI) are of the view that, since the regulation clearly enunciates that "direct plans" are for the transactions that are not routed through a distributor, there was no need to capture the distributor code on such transactions as it would mean that the transaction is routed through that distributor.

"The regulation clearly says that direct plans are for the transactions that are not routed through a distributor and thus, capturing the distributor code on such transactions would mean that the transaction is routed through that distributor. Therefore, ARN code cannot be captured on transactions received in direct plans. However, any distributor is allowed to advice the direct plans for a fee and there is no restriction there", said Mr V. Ramesh, Deputy Chief Executive of AMFI.

What can be inferred from such a note and its impact…

Well, it means that mutual fund houses will be restrained to provide data on direct plans to their mutual fund distributors, which as a result will impede service to the clients who approach a mutual fund distributor for an advice, pay his fees and invest in a mutual fund scheme's direct plan. Service such as generating portfolio, portfolio review, alerting a client when their investments reaches specified value, redeeming, etc. could be hindered, and although the option of clients forwarding the investment details and the advisor feeding these details manually is open; it could be a very time consuming, costly affair and chances of error could also be high.

We are of the view that by having in place a restrictive clause, the spirit of direct investing would get defeated. Even levy of exit load for moving from an existing / standard plan (which is distributor supported) to a "direct plan" is dampening the whole purpose for which direct plans are created. The purpose of having a "direct plan" was to reduce cost and not preclude mutual fund distributors from providing right service to clients who seek an expert's advice to pick winning mutual fund schemes for his / her portfolio.

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jalakhkar@gmail.com Jan 25, 2013 Actually, this whole structure of Direct vs. Regular schemes of mutual funds, especially Equity mutual funds, is loaded against old investors who have done direct investments through mutual funds websites or by directly submitting forms to the mutual funds. First of all, all the currently outstanding investments have been classified as "Regular schemes" regardless of how the investor made his investments.  At the first instance, I was shocked to learn that all my investments have been classified as "Regular schemes" although I have not interacted with a distributor for the last few years when SEBI allowed direct investments. When I inquired about switching from Regular scheme to Direct scheme, I was told that this is possible only through the "Switching" procedure after paying applicable STT.  From the point of view of Capital Gains tax, any short term gain would be taxed. After paying the STT and, where applicable, short term capital gains tax, what is the charm in switching to Direct schemes ? Your response will be highly appreciated.
mfvblogs@gmail.com Mar 09, 2013 Very good article. Do keep sharing.

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