MF distributor commissions go north with market rally

Aug 26 2014, 01:57 IST
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SummaryIt's raining commissions for mutual fund distributors. With the Indian equities surging to new highs, fund houses are paying through their nose to get distributors sell their open-ended equity schemes.

It's raining commissions for mutual fund distributors. With the Indian equities surging to new highs, fund houses are paying through their nose to get distributors sell their open-ended equity schemes.

Upfront commissions paid to distributors for selling open-ended equity schemes have risen to 2-3% in the last 2-3 months from 1-1.5% paid earlier, said industry observers. “Equity schemes have seen a good amount of inflows in the last three months and fund houses are using the opportunity to garner as much assets as they can, resulting in higher commissions,” said Niranjan Risbood, director — fund research, Morningstar India. Experts also believe that distributors are now actively churning assets more than a year old to take advantage of higher commissions.

Equity schemes saw inflows of over R20,000 crore from May to July, data collated from industry body Amfi shows. The benchmark BSE Sensex has risen 15.5% in the same period. Upfront commissions are paid to distributors on sale of equity schemes without accounting for the period for which the investor stays invested.

According to industry observers, fund houses have become desperate to garner assets particularly after the change in taxation rules on the debt side post Budget. The change in rules are widely expected to result in a decline in overall debt AUM. However, experts warn that the higher commission strategy could backfire in the long run. “This is an unhealthy trend. Using pricing as a tool to gather assets may pay off now, but is detrimental in the long term. Distributors can't keep making money at the expense of manufacturers,” said a fund house CEO, on condition of anonymity.

“High commissions may impact profitability since AMCs have to pay the money out of their own pocket, unless the assets remain with them for at least 3-4 years,” said Risbood. “If you want to remain competitive in this business you have two choices. Either you showcase your spending power to maintain your asset size, which most of the top fund houses are doing, or develop a niche positioning like some of the smaller AMCs,” said the CEO quoted above.

To be sure, fund houses have been paying high commissions for their close ended schemes, which have gained popularity since September last year. Upfront commission for close-ended equity schemes has varied between 5-7% compared with 1-2% for open-ended equity schemes.

“if you want to keep your open-ended funds alive, you need to pay the distributors

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