‘SEBI Must Plug Loopholes Of Direct Mutual Fund Schemes:’ Ajay Tyagi

Mr. Ajay Tyagi, SEBI Chairman, said that the Market Regulator must first plug the loopholes of direct mutual fund schemes before encouraging the mutual fund industry to advertise and promote these schemes, in a recent AMFI (Association of Mutual Funds in India) conference.

Direct mutual fund schemes provide many benefits such as increased transparency, reduced transaction costs, and lowers chances of mis-selling. Mr. Tyagi wants SEBI to block the loopholes which defeat the benefits of direct MFs.

First, the Market Regulator must properly enforce its advertising code and must prevent mis-selling or mis-representation of direct MF schemes.

Presently, many RIAs (Registered Investment Advisors) are advertising or promoting direct MF schemes through mis-selling or misrepresentation of the schemes.

The RIAs advertise or promote the direct schemes by projecting future returns which falls between 10 percent and 18 percent. This is a direct violation of the SEBI advertising code and the basic principle that future returns must not be projected.

Also, some RIAs advertise that investors can save up to 1.5 percent annually with direct MF schemes. But, the difference in returns between direct and regular plans is 1.5 percent only for less than five percent of MF schemes, and it can be as low as 0.02 percent.

Hence, the Regulator must block the loopholes of direct mutual fund schemes leading to mis-selling or misrepresentation of the schemes.

Next, SEBI needs to avoid any conflict of interest and prevent the misuse of investor education budgets.

Third, SEBI should penalize any violations of mutual funds from organizing events or offering kickbacks to potentially direct investors.

Few MFs are subsidizing their direct plan costs from regular plans. Hence, SEBI must prevent mis-accounting by making all acquisition/ servicing costs for direct investors to be borne only by direct plans, according to Money Control.

Mr. Tyagi, who said that that SEBI should block loopholes of direct mutual fund schemes, stated that the Market Regulator recommended capping the maximum TER (Total Expense Ratio) of mutual fund schemes, and barring MFs from paying distributors upfront commission, at the annual summit by AMFI, reported The Economic Times.

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