The Indian mutual fund industry has finally discovered a way to compensate distributors in the new commission regime. Trade body, Association of Mutual Funds in India (Amfi) had directed all fund houses to cap upfront commissions at 1% from April 1, 2015 and some have complied with the new norms in the last one month.
However, many large distributors are still in consultations with Amfi to modify the 1% upfront commission structure. A senior official from a top fund house said on condition of anonymity, “There are basically three commission structures provided to the distributors. One is 1% upfront and 0.50-0.75% trail commission, second is 0.5% as upfront and 0.75-1% as trail commissions. A third group of distributors are willing to let go upfront and are given trail commission of 1.5%.”
According to the Amfi, there will be a cap on upfront commissions at 1%, but fund houses can decide the trail on their own perpetual basis. Trail commissions are paid to distributors as long as investors stay invested in the scheme.
Suraj Kaeley, group president (sales & marketing) at UTI Asset Management Company (AMC) says, “Mutual fund penetration in India is still low compared to other economies. To reach out to more people we need expansion of both distribution network and independent financial advisors (IFAs). Fundamentally the current cap may still allow distributors to grow their business and increase penetration.”
In the last few months, Amfi and Securities and Exchange Board of India (Sebi) had some reservations on large amount of upfront commission on several equity and close ended equity schemes. To attract more investors, several fund houses were found giving upfront commissions as high as 5-7% on equity, equity linked saving schemes (ELSS) and close ended equity schemes to distributors.
Finally, Amfi in its circular had asked fund houses to cap upfront commissions to 1%. This move is likely to hit several distributors who were getting high commissions while selling the equity schemes, especially the close ended equity scheme. “Though Amfi is looking at several recommendations on upfront commissions and will review its decision by June. There might be some tweaking on the overall structure, but this rule is likely to continue going forward,” concluded a board member of Amfi.