Investors will soon get direct access to AIFs and that too at low fees

SEBI has introduced policy changes in the last few months to regulate capital markets including mutual funds (MFs), portfolio management services (PMS) and AIFs. These include new disclosure norms for listed companies, certification norms for MFs, enhanced obligations and responsibilities for qualified stock brokers and effective fund management norms for PMS. The latest round of reforms relating to AIFs is aimed at increasing transparency, curbing mis-selling and enabling direct investor access without intermediaries.

As per the Crisil report, the AIF sector grew at the fastest rate of 50% CAGR during 2017-2022. AIFs, which have been the preferred investment avenue for high net worth individuals, require a minimum investment amount 1 crore and primarily operate by the distribution model – investors have to pay distribution or placement fees.

Investors can now do without these charges. SEBI had recently issued a circular asking AIFs to provide direct plan option to on-board investors without any intermediary or distributor. This will reduce the cost of the investors.

For non-direct schemes, SEBI has made it mandatory to disclose the commission of distributors. It also said that Category III AIFs cannot have an upfront commission distribution model. For Category I and II funds, one-third of the total distribution charges may be paid upfront and the rest on trail basis.

Category I funds invest in start-ups or early stage enterprises. Category III funds, such as hedge funds, employ diversified or complex trading strategies and are permitted to borrow. Category II is a residual category which includes private equity funds and debt funds.

Sebi’s reforms, which will come into effect from May 1, were part of a consultation paper issued by the regulator in February.

go straight option

AIF schemes will now have a direct plan option for investors, as is the case with mutual funds. But, while expense ratios for MFs are fairly standardized, fees in the AIF space depend on fund managers. Typically, they charge a fixed and performance-based fee. Vineet Bagri, CEO of Athena Investments, said that the commission paid to distributors is a part of the management fee (and sometimes performance fee) charged from investors, and “typically 30% of such fee and 60%” Therefore, the management fee for the direct option, going forward, should come down to that extent.

If you are investing in an AIF on the recommendation of a SEBI Registered Investment Advisor (RIA), who is charging you a separate advisory fee, you will be on-boarded through the Direct Plan only.

“Until now, most AIFs did not have separate expense ratios for regular and direct plans. The benefit of lower fees was not available to the AIF investor even if the investment was made through RIAs to whom advisory fees were paid,” said Bagri.

Also, experts confirm that there will be different NAVs (net asset value) for both regular and direct plans, as is the case for MFs. A proposal in Sebi’s February consultation paper to allot more units to a direct investor was not mentioned in its recent circular.

trail-based commission

The new rules have also brought clarity in the payment of distribution commission. Anshu Kapoor, Chairman and Head, Nuwama Asset Management, said, “Prior to this regulation, there was no guidance available to the asset manager on how to pay distribution commission and structure the payment.”

Kapoor said asset managers have so far put in place their own mechanism or framework for making payments to distributors. With the new measures, Category III AIFs will charge distribution fee from investors only on a flat trail basis. That is, upfront distribution fee cannot be paid by such AIFs to distributors.

In many cases, according to SEBI, the distributors took 4-5% of the commitment amount as upfront commission. Going forward, such agreements will not be considered. Distribution commission on Category III AIFs is to be paid on a trail-basis only during the tenure of the scheme.

“Now, it is a level playing field for all equity products – MFs, PMS (portfolio management services) and AIFs – where it pertains to distributor commission. The incentive for upfront commission to drive sales has been removed and clients will now be recommended equity products on merit.

To be sure, some distributors opted for commission to be paid on trail models even before the proposed regulation.

“The commission is distributed as a percentage of the investment value at the time of payment. If the commission is already taken, the distributor cannot participate in the development of the fund. Therefore, there are distributors who have followed only the trail model for equity products. opted for.” Pallavarajan said.

SEBI has not mandated the trail model for Category I and II funds. Here, one-third of the total fee, for which the distributor is eligible, may be paid on an upfront basis and the balance may be paid on an equal trail basis during the tenure of the fund.

“Category one and two products are made up of asset classes such as private equity, real estate, private credit and venture debt funds. These are complex and sophisticated products that involve dedicated sales. The regulator has given some relaxation for these products,” Kapoor said.

For all categories of AIFs, the distribution commission is to be paid out of the management fee charged by the AIF to the investors only.

Disclosure of commission

SEBI mandates AIFs to disclose distribution/placement charges to each investor who signs up through a distributor. Mutual funds and PMS already disclose this information to investors. “An AIF investor will now be able to differentiate between the cost paid to the fund manager and the cost paid to the distributor/advisor. This will bring in more transparency,” said Sahil Kapoor, Senior Executive Vice President, 360 One Wealth.

For this information, the AIF investor can refer to the Private Placement Memorandum or PPM issued at the time of onboarding. It is the primary document in which all the necessary information about the AIF is given to the investors. This is a standard formatted document across all AIFs.

To be sure, “A mutual fund investor can go through the CDSL/NSDL CAS statement generated for a period to see the distribution amount paid by the fund house,” said Rishabh Desai, Founder, Rupee With Rushabh Investment Services. Is.”

industry plea

Separately, fund houses and distributors in the AIF sector want the regulator to relax norms for promotion of AIF products.

“Today, all AIFs are sold on private placement basis. Hence promotion is hindered. With the new regulations it will help if the data is made publicly available and people are allowed to do research like in the mutual fund industry. There should be some relaxation now as direct route is allowed and there is more transparency for investors,” Kapoor said.