Incentives lure MF investors to risky schemes

Kavitha Venkatraman

WITH competition turning hotter and hotter, financial distribution companies marketing mutual fund products, among others, are dishing out cash incentives and freebies to woo investors in a big way. While some offer free investment advice to novice investors, the more aggressive ones are passing on a part of the commission they get from mutual fund companies to their customers.

Industry insiders say that though this has been the practice with some distribution companies for quite some time, the idea is fast catching up with the rest, forcing almost all distribution companies operating in the country to follow the strategy to beat competition.

In a bid to spruce up their business volume, distribution companies are passing on between 50-75 per cent of their commission as a cash incentive to investors. A distributor normally gets 0.5 per cent to 2 per cent as commission for selling mutual fund products, depending on the risk level of the scheme.

With incentives becoming the order of the day, industry insiders feel that there is a lurking danger of some distribution companies luring investors to schemes with a higher risk level.

“The attraction of an immediate cash incentive leaves the new and inexperienced investor with little time to look into the merits of the scheme in which he is investing. This may well lead to a situation similar to the non-banking finance companies (NBFCs), which offered mind-boggling interest to investors, but went bust when the market turned bad,” sources say.

Investors new to the mutual fund industry prefer to invest in schemes that offer the maximum amount of incentive, instead of going through the usual process of investment counselling.

Though some distribution companies still follow the traditional method of offering investment counselling, investors are now turning their back to such services, forcing them to do away with them. “Some investors look at the incentive to decide on the scheme they wish to invest in. The more the incentive, the more likely investors are to be attracted to the scheme,” say the sources. What compounds the problem, sources say, is the callous attitude of some distribution companies in attracting more investors to those schemes that are highly beneficial for them. For instance, any MF company would give the highest rate of commission to equity schemes, which are high risk schemes, say the sources.

According to MF companies, the incentive package does not have any impact, either on the investment pattern, or on market conditions. However, they also say that there should be stringent regulations governing the operations of distribution companies. Currently, even though there are rules that govern the MF industry, there are no regulations to check the functioning of the distributors. Recently, the sources said, some distribution companies have come forward to float an association that will regulate their functioning.