Mutual funds are on course to meet the 1 October deadline to disclose distributor commissions. In a circular issued on Tuesday, capital market regulator Securities and Exchange Board of India (Sebi) reiterated its earlier stand that all fund houses will have to start disclosing their commissions to distributors on investments in common account statements (CAS), on a half-yearly basis.
But softening its earlier stand, Sebi said that fund houses will need to disclose the total expense ratio of only those plans (regular or direct) that the investor has put money in. So if an investor has invested in a regular plan, then the fund house has to disclose only the regular plan’s expense ratio in CAS, and not the direct plan.
In the earlier circular issued on 18 March, Sebi had said that fund houses will have to print the total expense ratios of direct plans also, even if the investor opted for a regular plan. “This has resulted from the representation that the mutual funds industry made to Sebi to explain that if investors invest in regular plans (through their distributor), there’s no need really to print the expense ratio of the direct plan. That request has been accepted,” said A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd, adding that Sebi was also requested to reconsider its decision of disclosing distributor commissions in absolute (rupee) terms. “But that appears to have been denied,” he said.
Many distributors at the time felt—and still do—that commissions should be disclosed in percentage terms. “When equity markets go down, an investor’s CAS would show the value of her investments drop but not necessarily her distributor’s commissions, which will be disclosed now in absolute terms or in rupee terms. In those times, the investor should be sticking to her distributor and ensuring that she continues to stay invested, or better still, invest more. Instead, she could pay more attention to the fact that the distributor has earned the commission despite the fall in her investments’ value. This could be misleading,” said Amol Joshi, founder, PlanRupee Investment Services.
Will investors benefit from by this move? Joshi feels this move will increase transparency. But Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd, said, “Are investors mature enough to understand why they are paying the cost? I hope investors value the cost they pay to distributors.”
Moreover, CAS just tells you how much you invested and the latest value of your investments; it doesn’t tell you the percentage growth or loss, or benchmark comparison. “Without knowing the value received versus cost incurred, commission disclosure in isolation doesn’t make much sense,” said Rohit Shah, a Sebi-registered investment adviser, and founder and chief executive officer, Getting You Rich, a financial planning firm.