Mumbai: The Securities and Exchange Board of India, or Sebi, has asked asset management firms (AMCs) to cap the fees they pay mutual fund (MF) distributors, following concerns about AMCs’ profitability.
“We have met the mutual funds in mid-August and have asked them to have uniformity on the upfront commission paid to the distributors,” said a Sebi official on condition of anonymity. “This is an attempt to ensure profitability of the industry.”
After Sebi scrapped entry loads, or fees paid up front by investors, in August, distributors found it unprofitable to service small investors. As a result, sales of MF units in that month dropped 40% and some fund houses started to pay upfront fees as high as 1.25% to distributors to push their products. Apart from this, MFs also pay so called trail commissions to brokers, or fees paid if an investor parks his money for at least a year.
With the 2.25% entry load gone, mutual fund firms have had to pay these brokerages out of their own earnings, which could potentially hurt their profitability and stability.
According to the sales head of a Mumbai-based mutual fund, who declined to be named because of company policy on speaking to the media, high commissions attract more distributors and may result in higher sales, but also eat into the earnings of AMCs.
“The imbalances cannot carry on,” said Amit Gupta, vice-president and country head-retail sales, Taurus Asset Management Co Ltd. “How can we (AMCs) pay more when we ourselves are earning 1-2%?” This is based on the total asset size of an equity fund.
N. Sundaresha Subramaniam contributed to this story.