Market regulator Securities and Exchange Board of India, or SEBI, recently allowed mutual fund distributors to charge investors a fee of Rs 100 for an investment of Rs 10,000 and above and an extra Rs 50 from first-time investors. Those who buy schemes directly from fund houses will not be charged any such fee. For systematic investment plans, or SIPs, which require a fixed sum to be invested at regular intervals, the fee can be recovered in three to four instalments. This fee will be in addition to the existing commissions permissible to the distributors.
What will change?
The move is expected to boost retail participation in mutual fund schemes, which have seen a tepid growth since the 2009 ban on entry load, an upfront commission paid to distributors on the total value of a transaction. The ban made selling mutual funds unattractive, impacting their sale amongst retail investors. In 2010/11, the total assets under management, or AUM, the total investments managed by fund houses, fell 3.54 per cent to Rs 5.92 trillion from Rs 6.13 trillion a year ago, mostly due to a sharp fall in the retail base. "Mutual funds account for barely four per cent in the investment portfolio of households. SEBI wants to favour agents in their efforts to increase the retail investor base," says Surajit Misra, National Head (Mutual Funds), Bajaj Capital, a large distributor of mutual funds. A large number of independent financial advisers, who had shut shop in the past two years - their number has nearly halved from around 40,000 before the ban - could also return.
What is the problem?
The quantum of incentives for distributors is much smaller this time. In the days of entry load, they used to get an upfront commission of 2.25 per cent on every transaction. For instance, a Rs 10,000 investment into an equity scheme fetched them Rs 225. "We are [now] directly competing with insurance firms that are now also offering shorter duration schemes. If the insurance industry gives them better deals, distributors will push their products. We need a levelplaying field," says Debasish Mallick, MD & CEO, IDBI Asset Management. "Also, in a small town or semi-urban areas, Rs 100 can be a decent amount, but not in a place like Mumbai where the cost of providing basic services is high," says Bajaj Capital's Misra. The new regulation could also encourage unfair trade practices, as agents may be tempted to split large-size investment of clients into various smaller ones in order to maximise their fee income. Global experience: In Australia, Britain, South Africa, and the United States, there are front-end load schemes that charge distribution fees from investors at the time of purchase of mutual funds.