Commission structures for selling equity mutual fund (MF) schemes are back to the high levels witnessed prior to the entry load ban. MF distributors are today pocketing commissions of 2-3% on committed SIP (systematic Investment Plan) amount, even though such investments flow only over a period of time.
For instance, for a three-year monthly SIP of Rs 10,000, upfront commission of Rs 8,000 is given, which is equivalent to 2.25% of total investment. For five-year SIPs, it goes up to Rs 22,000 or 3.75% of investment committed. Prior to the Sebi ban on entry loads (August 1, 2009), mutual fund houses used the entry loads, which were charged to the investors, to pay the distributors. But post ban on entry loads, commissions structures fell. Now, the incentive structures are back with a vengeance, probably given buoyant equity market conditions.
Achal Kumar Gupta, MD of SBI Mutual Fund says, ?After the ban on entry load, upfront commissions have gone up for different schemes. For SIPs, commission structures vary based on the tenure of the investment.?
While some are giving upfront commission, others are giving a flat commission of Rs 1,000 per application for getting an SIPs account. According to the data provided by CAMS, in the month of August, 3.2 lakh of new SIP accounts were opened by its MF clients, as compared to 1.7 lakh in April 2010. Bulk of the incremental gain has come from non-metros, where the equity culture is seemingly catching on. T P Raman, MD of Sundaram Mutual Fund says, ?Our sense is that distributors are slowly coming in and selling MF products. Banks and national distributors were already selling funds. But now we are witnessing independent financial advisors coming back again.?
Market participants say many fund houses which made higher profits last year are now not hesitating to give higher upfront commission from their own pockets to push its products. In the financial year 2009-10, 23 out of 41 fund houses reported profits, with top-five fund houses making profit in excess of Rs 100 crore.
A CEO of a leading fund house said, ?After the ban on entry load, upfront commission came down to as low as 0.75-1%. But now with markets touching new highs and sustained outflows from the equity schemes have forced them to give more commissions in order to survive in in this market.?