While the mutual fund (MF) industry has welcomed Sebi?s move to compensate distributor with a one-time transaction fee, the distributors community feel the remuneration isn?t adequate, especially for selling in urban areas.
On Thursday, Sebi had allowed MF distributors to charge investors R100 as transaction fee per subscription and an additional R 50 for first time investors on investments of R10,000 or above.
?While we are awaiting more clarity, we feel R100 transaction charge is very little for an urban distributor to service his or her client? says Surajit Misra, executive vice-president and national head-mutual funds at Bajaj Capital. Misra added that such fees would be adequate only for a distributor servicing in the semi-urban or rural areas. Market participants feel this new regulations while not expected to bring large inflows into the industry could help increase rural penetration. Since August 2009 when the entry load was banned, many small distributors, especially independent financial advisors (IFAs), had stopped selling equity funds, due to lack of adequate compensation. In the last financial year, equity schemes saw net redemptions over R13,400 crore. ?I think it is a right move which will bring lot of retail participation into the MF industry. A distributor is now adequately incentivised to provide that last mile connectivity to the retail investor which was missing till now? said Sundeep Sikka, CEO of Reliance MF.
While IFAs contribution to assets in top metros constitute about 29%, they provide a vital link in rural areas with their asset share constituting 51% beyond top 30 cities.
Sikka said that the R100-150 transaction fee is not lesser, as popularly believed, as distributor could also additionally charge for his advisory services.
A leading independent financial advisor (IFA) in Mumbai says, ?This move, if unchecked, could lead to mis-selling as distributor would be incentivised to split investments across multiple funds to earn higher transaction fee in the name of diversification?.
MF investments into equity funds on an average are about R20,000 . By that logic, distributors? fees under the new fees structure would amount to 0.5-0.75% of invested amount. At the time of existence of entry load, the fees averaged about 2.25% of invested amount. In monetary terms, for the above example, a distributor would have got R500, before ban was imposed on entry loads.
?Some of the fund houses are giving over 1% upfront (commissions) on selling systematic investment plans (SIPs) which comes to around R240 on SIP investments of R2,000 per month for one year? said a distributor on condition of anonymity. ?After one year we get trial commissions which is over 50 bps? he said.