×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

MF distributors don’t find fee pie enough

MF distributors don’t find fee pie enough
Comment E-mail Print Share
First Published: Mon, Sep 12 2011. 12 19 AM IST
Updated: Mon, Sep 12 2011. 12 19 AM IST
Mutual fund distributors don’t seem to be satisfied with the pie, the regulator especially made for them. Last month, the Securities and Exchange Board of India (Sebi) introduced a transaction charge for mutual fund (MF) sales, but distributors are not finding the compensation good enough. At least 55% of distributors surveyed by Cafemutual, an independent forum of MF professionals, found it too insignificant.
The recent study was conducted among 756 independent financial advisers and was aimed at gauging distributors’ reaction to the Sebi move. The regulator has allowed distributors to charge a fee on investment of Rs 10,000 or more. The charges are Rs 100 per transaction for an existing MF investor and Rs 150 for a first-time customer.
Also See | General View (PDF)
The idea behind introducing these charges was to encourage distributors to sell MFs and thereby expand the product’s reach eventually. But given distributors’ lukewarm response, it seems unlikely that Sebi’s purpose will fructify. In fact, only 25% say MF sales will increase due to the transaction fee.
Tough times for industry
The MF industry has had a tough time ever since entry loads were banned in August 2009. In the face of low commissions, several distributors turned to high commission-paying insurance products.
Over time, this has resulted into lower inflows into the MF industry. In the equity scheme segment, the net inflow has been declining continuously. According to data provided by the Association of Mutual funds in India (Amfi), an industry body, the net inflows at Rs 1,056 crore in 2008-09 declined to Rs 595 crore in 2009-10. In 2010-11, the industry has reported a negative inflow or net outflow of Rs 13,405 crore.
The number of investors in MFs too has remained almost stagnant over the last few years. As per Amfi data, the total number of customer folios at the end of March 2011 stood at about 47.23 million compared with 47.96 million at the end of March 2010.
But if the survey findings are anything to go by, turbulent times are not yet over for the industry.
Not gratifying enough
As many as 419 independent financial advisers (IFAs), out of 756, wrote off the fee as insignificant and only 71 felt the incentive is good. The surveyed IFAs indicated at the industry’s mood, with at least 73% saying the move will not encourage advisers. A majority of them, at least 75%, also feel the move will not help increase MF sales.
“The transaction charges are seen to be too inadequate to have any impact on the financial advisers propensity to push MFs. Only 25% of IFAs felt that MF sales would go up as a result of transaction charges,” says Prem Khatri, founder and CEO, Cafemutual.
Asked whether inactive IFAs would start taking interest in selling MFs, 75% replied in the negative. Agrees a Delhi-based independent distributor, who did not want to be named, “If someone is investing say Rs 15,000, I would get about Rs 200, including the transaction fee and the commission from the fund house. We have transportation and other costs to meet. It is unviable to operate for a small fees.”
Splitting investments
Many MF experts have expressed apprehension that in the wake of the new guidelines, distributors would look at splitting the investment amount. So a person investing Rs 50,000 may be told to invest Rs 10,000 each in five different mutual funds and pay the transaction fee five times instead of just once. Fearing the same, Sebi had instructed asset management companies to put in place a system to detect such practices.
Disturbingly, the survey findings point out that distributors are indeed looking at this possibility. Close to 71% of IFAs were of the view that they would split customers’ investments into different applications to maximize their earning.
The move may also lead to mis-selling and churning. “In a bid to earn more, distributors may ask customers to invest in as many schemes as possible. Also, if a customer has earned say 10% return on equities in say five months, distributors may advise customers to switch to say a debt product for stable returns. Whether that is advisable depends on the customer’s portfolio, but it will sure provide the distributor another opportunity to earn,” says another Delhi-based distributor, who didn’t want to be named.
However, an interesting finding of the survey is that despite the discontent regarding the overall compensation, close to 49% IFAs said they would like to opt out of charging a fee from customers.
Debt funds may gain popularity
Distributors prefer to push equity schemes compared with debt schemes since the commission earned from fund houses is higher in equity funds—equity schemes give 0.50-0.75% in commissions, while debt schemes, including liquid funds, give 0.15-0.25%.
But the extra transaction fee, applicable both on equity and debt schemes, may make selling debt schemes viable for distributors now.
“As the compensation was very low, retail distributors earlier would not bother to sell debt and liquid funds. But as the distributors may now receive Rs 100-150 for high-ticket investments, they would get rid of the negative bias against these schemes,” says Khatri.
What you should do
As an investor, you need to understand your portfolio well and not blindly believe what your distributor tells you.
Split your investments only if it helps you diversify and the combination helps you meet your goals. Also, remember that you need to be invested in equities for at least three years for them to play out in the market. So think before churning funds.
Mutual fund distributors don’t seem to be satisfied with the pie, the regulator especially made for them. Last month, the Securities and Exchange Board of India (Sebi) introduced a transaction charge for mutual fund (MF) sales, but distributors are not finding the compensation good enough. At least 55% of distributors surveyed by Cafemutual, an independent forum of MF professionals, found it too insignificant.
The recent study was conducted among 756 independent financial advisers and was aimed at gauging distributors’ reaction to the Sebi move. The regulator has allowed distributors to charge a fee on investment of Rs 10,000 or more. The charges are Rs 100 per transaction for an existing MF investor and Rs 150 for a first-time customer.
The idea behind introducing these charges was to encourage distributors to sell MFs and thereby expand the product’s reach eventually. But given distributors’ lukewarm response, it seems unlikely that Sebi’s purpose will fructify. In fact, only 25% say MF sales will increase due to the transaction fee.
Tough times for industry
The MF industry has had a tough time ever since entry loads were banned in August 2009. In the face of low commissions, several distributors turned to high commission-paying insurance products.
Over time, this has resulted into lower inflows into the MF industry. In the equity scheme segment, the net inflow has been declining continuously. According to data provided by the Association of Mutual funds in India (Amfi), an industry body, the net inflows at Rs 1,056 crore in 2008-09 declined to Rs 595 crore in 2009-10. In 2010-11, the industry has reported a negative inflow or net outflow of Rs 13,405 crore.
The number of investors in MFs too has remained almost stagnant over the last few years. As per Amfi data, the total number of customer folios at the end of March 2011 stood at about 47.23 million compared with 47.96 million at the end of March 2010.
But if the survey findings are anything to go by, turbulent times are not yet over for the industry.
Not gratifying enough
As many as 419 independent financial advisers (IFAs), out of 756, wrote off the fee as insignificant and only 71 felt the incentive is good. The surveyed IFAs indicated at the industry’s mood, with at least 73% saying the move will not encourage advisers. A majority of them, at least 75%, also feel the move will not help increase MF sales.
“The transaction charges are seen to be too inadequate to have any impact on the financial advisers propensity to push MFs. Only 25% of IFAs felt that MF sales would go up as a result of transaction charges,” says Prem Khatri, founder and CEO, Cafemutual.
Asked whether inactive IFAs would start taking interest in selling MFs, 75% replied in the negative. Agrees a Delhi-based independent distributor, who did not want to be named, “If someone is investing say Rs 15,000, I would get about Rs 200, including the transaction fee and the commission from the fund house. We have transportation and other costs to meet. It is unviable to operate for a small fees.”
Splitting investments
Many MF experts have expressed apprehension that in the wake of the new guidelines, distributors would look at splitting the investment amount. So a person investing Rs 50,000 may be told to invest Rs 10,000 each in five different mutual funds and pay the transaction fee five times instead of just once. Fearing the same, Sebi had instructed asset management companies to put in place a system to detect such practices.
Disturbingly, the survey findings point out that distributors are indeed looking at this possibility. Close to 71% of IFAs were of the view that they would split customers’ investments into different applications to maximize their earning.
The move may also lead to mis-selling and churning. “In a bid to earn more, distributors may ask customers to invest in as many schemes as possible. Also, if a customer has earned say 10% return on equities in say five months, distributors may advise customers to switch to say a debt product for stable returns. Whether that is advisable depends on the customer’s portfolio, but it will sure provide the distributor another opportunity to earn,” says another Delhi-based distributor, who didn’t want to be named.
However, an interesting finding of the survey is that despite the discontent regarding the overall compensation, close to 49% IFAs said they would like to opt out of charging a fee from customers.
Debt funds may gain popularity
Distributors prefer to push equity schemes compared with debt schemes since the commission earned from fund houses is higher in equity funds—equity schemes give 0.50-0.75% in commissions, while debt schemes, including liquid funds, give 0.15-0.25%.
But the extra transaction fee, applicable both on equity and debt schemes, may make selling debt schemes viable for distributors now.
“As the compensation was very low, retail distributors earlier would not bother to sell debt and liquid funds. But as the distributors may now receive Rs 100-150 for high-ticket investments, they would get rid of the negative bias against these schemes,” says Khatri.
What you should do
As an investor, you need to understand your portfolio well and not blindly believe what your distributor tells you.
Split your investments only if it helps you diversify and the combination helps you meet your goals. Also, remember that you need to be invested in equities for at least three years for them to play out in the market. So think before churning funds.
Graphic by Yogesh Kumar/Mint
abhishek.a@livemint.com
Comment E-mail Print Share
First Published: Mon, Sep 12 2011. 12 19 AM IST