Gain or loss?

The recent Sebi diktat to do away with entry loads on mutual funds has resulted in mixed feelings among the three key stakeholders.

Narayan Krishnamurthy        Print Edition: July 23, 2009

The recent Sebi diktat to do away with entry loads on mutual funds has resulted in mixed feelings among the three key stakeholders—the AMC, the distributor and the investor. The ruling supports the investor in the long run, but the regulator has taken the decision without understanding the role of the distributor. In any business, the intermediary plays an important role in bridging the gap between the buyer and the seller for a fee or commission.

Unlike other businesses, where products are bought, not sold, financial products are sold, not bought. For instance, 80% of the mutual fund sales are accounted for by the top eight cities, which explains the need for a distributor to push them to a wider retail audience. Moreover, the state of the industry is reflected by the asset it manages, which is skewed towards debt products and corporate money.

Fracas over fees
Commission is paid on insurance, assumed to be sold on advice.
Commission is also paid on post office products, PPF and others which involve little advice.
AMC pays trail commission of up to 0.5% to distributors who can retain assets for a year.
The move encourages distributors to sell high commission products.

Says Suresh Sadagopan, financial planner: “In the present system, the AMC depends on distribution to push products. This is evident from the commission they earn. Once the new regime kicks in from 1 August, the intermediaries won’t be interested in selling MFs.” As for the 2008-9 sales of equity funds, 33% of the business was routed through independent financial advisers (IFAs), banks accounted for another 32%, and 26% was by national distributors. In January 2008, Sebi allowed a window for investors to bypass distributors and directly invest in AMCs. But, according to the fund industry, the move has been inconsequential, with few takers.

For AMCs, the new regime, with no entry loads and the exit load capped at 1%, means that running the operations will be difficult. The expenses for running the funds will go up, already at about 2% for most equity funds. As a result, the AMCs will find it hard to infuse fresh funds in existing schemes and the new schemes will get, at best, reluctant distributors.

As for the investor, does he really gain from the move? The savvy ones are already putting in money directly in an AMC, doing away with distributor commissions. The average investor is unlikely to benefit: since a fund will no longer be sold to him, the investor will have to either seek advice or buy blindly.

In addition, confusion abounds on the variable fee that one can charge the customers for advice. This will bring the fund distributor on a par with a vegetable vendor, where haggling will dominate the fund selection process. Consequently, the investor is more likely to end up with a fund that is available for less, instead of a fund that suits him.

Says Rajesh Krishnamoorthy, managing director, iFAST Financial India: “It will be tough for a distributor to ask an investor to drop two cheques—one for investing and the other for advisory fee.” There is also a lack of clarity on what happens to SIPs, which account for over 1.25 crore folios. How will the advisory fee be paid and reconciled by the distributor or AMC in this case?

It’s a case of too many cooks. The financial services industry is governed by multiple bodies, such as Sebi, Irda, RBI and now Pfrda, each with a different view on furthering the cause of the industry as well as the investor. There is a need to bring all the financial intermediaries under a single regulator. This will ensure a level playing field that will help develop the industry and enhance financial literacy
- Narayan Krishnamurthy

The number game
Assets managed by insurers: Rs 9,31,000 crore.
Assets managed by mutual funds: Rs 4,17,300 crore.
In 2008, insurance firms put in Rs 58,000 crore in the market.
Mutual funds invested Rs 7,000 crore in the same year.
LIC to invest Rs 50,000 crore in 2009-10.

Market insurers
Every investment talks of the virtues of a long-term, disciplined approach. To some extent, insurance companies do just that for the stock markets. The insurance premium collected by the Ulip policies are regular streams tapped by insurers and put in the markets. Today, at Rs 9,31,000 crore, insurers have twice the total AUM of MFs invested in the markets.

Moreover, they infused Rs 58,000 crore in 2008, when MFs had placed only Rs 7,000 crore. Things are looking up this year too, with LIC alone planning to invest Rs 50,000 crore. Given that insurers parking funds in the market do not face short-term redemption pressure, they don’t have to produce returns on a weekly, monthly or yearly basis. This allows the insurance companies involved to make prudent, long-term investments. This acts as a ballast to the markets. Better still, investment in pension and insurance schemes is set to grow bigger. This assures continued inflow of long-term stable money in the market for several years.
- Narayan Krishnamurthy

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