MFs woo investors via application incentives

Mukta Malhotra

Mumbai, June 6: INVESTORS can make money upfront merely by subscribing to the mutual funds’ new schemes as some distributors of mutual funds, in their efforts to lure retail investors back to their fold, are offering ‘applicatiom incentives’ of around Rs 50-150 per single application form.

Though the practice of giving application amount to distributors has been prevalent earlier to some extent, it has become more rampant with many mutual funds offering the incentive to distributors in the form of application money of Rs 100-200 apart from the normal brokerage ranging from 0.25 per cent to 1 per cent and distributors increasingly passing it on to the investors.

The head of sales and marketing of a private sector mutual fund siad, “Earlier, it was hardly two or three mutual funds giving an incentive in the form of application money, but at present many others have jumped on the bandwagon. The practice was also seasonal or for some part of the year but it now has become more of a regular practice.”

Mutual funds which are aggressively trying to woo investors include Templeton Asset Management (India), Kothari Pioneer AMC, Birla Sun Life AMC and Zurich Asset Management (India).

Fund houses, for example Cholamandalam Cazenove AMC, are understood to have been giving gifts to investors investing in their funds. Bluechip Corporate Investment Centre — one of the distributor — is understood to have been giving a flat rate of Rs 50 per application for any application amount (the minimum amount being Rs 10,000) for schemes of Templeton Asset Management (India) while for Birla Sun Life Mutual Fund it is giving Rs 50 for application amount up to Rs 14,000 and Rs 75 for application amount of Rs 15,000 or more.

During the month of February and March, a number of mutual funds had given an amount of Rs 100-200 per application to their distributors (percentage of which was passed on to investors) as an incentive during the launch of their equity-linked savings schemes (ELSS).

This stiff competition among mutual funds to increase their retail base offers investor an opportunity to make some quick bucks. Investors intending to invest around Rs 30,000 in any mutual fund could split the amount in multiples of Rs 10,000 (minimum application money) each into three different application forms and earn around Rs 300 upfront.

This is a return of around 12 per cent on an annualised basis if the investor redeems the money in a month, considering there is no exit load in the scheme. While equity schemes of nearly all mutual fund schemes have no exit loads in case of debt funds, some of the income schemes charge an exit load for redemptions in a period less than three months.

Interestingly, what an investor could do is earn still higher returns by investing the same Rs 30,000 once again after redeeming, only to get back the ‘application incentive’. With the cycle of investment and redemption going on each month, the ‘application incentive’ alone could help him to earn comparatively high annualised returns.
According to some fund managers, offering this incentive besides the normal brokerage for investing in the mutual fund would not make economical sense to mutual funds. Some industry observers do not rule out the possibility of distributors investing in the name of different investors and using the opportunity to make some good money themselves.

However, the reason for MFs offering money with the application form is that it would help them to increase their retail base who unlike corporates, stay in for a longer time. According to some MFs, the money offered is only diversion of the advertisement money used for customer acquisition since advertising would not yield much result in present market conditions.

Recently, most of the mutual fund have drastically cut their advertising budgets. However, as per some of the industry experts, the practice could well be termed as mis-selling of mutual fund products. Their argument is that MF products should only be sold to an investor according to his risk-return profile and not by luring them with incentives. This is despite a working group on best practices for sales and marketing of mutual funds being formed by Amfi to formulate general guidelines specifying qualifications, certification criteria and healthy practices to be followed by distributors.

However, the present situation offers investors not only an opportunity to take advantage of the desperation of MFs to get retail customers but also outwit them.