AMFI’s request to allow fund houses to allocate some expenses in direct plans has not gone well with the market regulator.
In a letter sent to AMFI, SEBI said that the proposal on allocation of expenses between direct plan and regular plan has not been acceded to.
Earlier, AMC officials have claimed 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.
They claim that the expense ratio of direct plans has 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.
However, SEBI has 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.
Further, SEBI has clarified AMCs need not inform investors if they reduce TER. SEBI said, “The interpretation of AMFI that the downward change in base TER in direct plan due to change in expenses of regular plan may not necessitate an advance notification to investors as the same is necessitated due to regulatory requirement, is accepted.”
Typically, selling and distribution expense component in the regular plan component keep changing due to changes in flows, AUM size, brokerage rates, sales activities etc. This led to adjustment of management fees in the regular plan to ensure that the overall TER limits are adhered to.