The Securities and Exchange Board of India (Sebi) on Monday directed Alternative Investment Funds (AIFs) to provide the option of direct plans to investors. Such investors will not pay any distribution or placement fees.
Further, AIFs shall ensure that investors who approach the AIF through a Sebi registered intermediary which is separately charging the investor any fee — such as an advisory fee or portfolio management fee — are on-boarded via direct plans only, market regulator said.
Direct plans could help investors save on expenses and indirectly benefit family offices and independent advisors who rely predominantly on a fee-based model. Direct plans exclude the commission or fee paid to distributors, resulting in lower expenses and schemes with higher net asset values. This will also help level the playing field with mutual funds and PMS, which also offer such plans.
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Let’s assume an investor puts in Rs 1 crore into an AIF scheme that yields 10% returns. If the investor saves 100 basis points on distributor commission, he could end up earning Rs 2.4 million more than a regular plan at the end of the tenth year, estimates suggest.
Category I AIFs and Category II AIFs may pay up to one-third of the total distribution or placement fee to the distributors on an upfront basis, and the remaining on an equal trail basis over the tenure of the fund. No upfront fees can be charged by category III AIFs.
“The introduction of direct plans can result in a larger allocation from institutions and informed investors,” said Anshu Kapoor, President & Head, Nuvama Asset Management. “It will help if Sebi allows asset managers more flexibility in marketing, promoting AIF schemes and in creating tools for investors to discover, research and evaluate AIF products. Today, the ability to share information of AIFs in public domain is very limited.”
The disclosure of fees will increase transparency and distributors or intermediaries will be encouraged to select products on their merits, which includes performance and track record, Kapoor said.
The minimum ticket size for investing in AIFs is currently Rs 1 crore. AIFs typically charge a fixed as well as variable fee based on the performance. A portion of this is paid to distributors as commission.
“The introduction of direct plans in AIFs along with the migration to the trail model of brokerage presents a double whammy to large wealth management firms and banks as they sell AIF basis large upfront commissions, which may get impacted,” said Sameer Kamdar, founder & CEO, Smart Money.
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Kamdar believes that some of their large ticket HNI and family office customers may now opt to invest in direct plans of AIF, potentially hurting their income streams.
The move will, however, create a level playing field for the AIF industry as some manufacturers had a tendency to pay out higher upfront commissions to the distributors, said Daniel GM, founder-director at PMS Bazaar.
“The distributors and investment advisers will have greater incentive to serve the clients for a longer period of time because of the trail commission. This will benefit clients. Gradually, we expect upfront commissions to be abolished for all investment products,” he said.
Not all clients, however, may migrate to direct plans. AIFs have a differential fee structure depending on the ticket size. Typically, higher the ticket size lower is the fee. So, larger clients may still find it prudent to come through an advisor or distributor, said experts.
“AIFs are specialised investment products, which is why many clients may still prefer a regular plan over going direct. It is practically impossible for a manufacturer to reach out to all clients directly. A lot of wealth managers have already moved to the all-trail or profit-sharing model and to that extent the impact on them would be limited,” said Siddhartha Rastogi, COO, Ambit Investment Advisers.
Individual investors held Rs 23.4 trillion in mutual funds as of February 2023, of which 23% was in direct plans. For MFs, direct plans were introduced in 2013.
AIFs are still a small category with assets of about Rs 7 trillion, compared with mutual funds (Rs 40 trillion) and PMS (Rs 26 trillion).
