AMC officials are claiming that they have been facing difficulty in maintaining difference between the expense ratio of direct and regular plans to the extent of the distribution commission.
In a letter sent to SEBI, AMFI has requested the market regulator to allow fund houses to allocate some expenses in direct plans.
Earlier, SEBI had clarified that all fees and expenses charged in a direct plan (in percentage terms) under various heads including the investment and advisory fee should not exceed the fees and expenses charged under such heads in a regular plan. Simply put, the difference between the expense ratio of direct and regulator plans would now be to the extent of distribution commission.
However, the expense ratio of direct plans has reportedly gone up under the new TER regime. Fund officials said that expenses incurred towards KYC and marketing costs such as printing of application form and fact sheets has increased due to lower volume of direct plans.
Since the volume of regular plans is significant, the benefit of economies of scale comes into picture that reduces such costs. However, this may not be possible for AMCs in direct plans, said fund officials. Currently, many fund houses charge most expenses on AUM basis.
AMFI said, “It is submitted that it will be more appropriate to allocate some expenses, due to their nature, among regular and direct plans based on transaction count, folio count. We therefore request SEBI to address this with suitable clarification.”
If SEBI allows fund houses to go for such pricing in a few components of direct plans, the TER could go up or down depending on volume of direct plans.
Further, AMFI has sought clarification from SEBI if fund houses need to issue a notification to investors if they reduce TER. “Selling and distribution expense component in the regular plan component will keep changing depending of flows, AUM size, brokerage rates, sales activities etc. This will therefore, necessitate adjustment of management fees in the regular plan to ensure that the overall TER limits are adhered to. The above will entail alignment of management fees in the direct plan, which will result in a change in the base TER of the direct plan. It is our understanding that such a change, if downwards, will not necessitate an advance notification to investors.”