‘Though it may seem that steps are being taken to rein in mis-selling in the industry, this announcement is unlikely to have much impact,’ says the CEO of a fund house.
The Indian mutual fund industry, which was awaiting clarity on the issue of upfront commissions, finally got a proposal from the Association of Mutual Funds in India (Amfi) to cap commissions. The mutual fund trade body in its proposal has asked fund houses to cap the upfront commissions at 1%, which is likely to be implemented from April1, 2015.
In the past few months many fund houses came out with various new fund offers (NFOs) to ride equity market surge. In order 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.
Sebi had expressed its discomfort with such high upfront commissions which could hurt the profitability of small fund houses. Out of 42 fund houses in the country, 20 have registered losses for 2013-14. A person familiar with the development said, that apart from upfront commissions Amfi has also asked fund houses to pay a blanket trail commissions across the tenure. For example if one fund house pays 0.75 basis points (100 basis points=1%) as a trail commission than they should continue with the same percentage as long as investors stays invested in the scheme. Currently many fund house even pay upfront and trail commission together in many close ended equity schemes.
The CEO of the mid-size fund house says, “Though it may seem that steps are being taken to rein in mis-selling in the industry, this announcement is unlikely to have much impact. Though Amfi has asked for a same trail commission across the tenure, we are likely to see fund houses hike trail commissions to distributors and that can also lead to churning of the portfolio.”
Amfi will monitor the proposals for next six months and review them if necessary. SN Baheti, MD and CEO at IDBI Asset Management Company says, “I think we need a system where distributors and fund houses make money and at the same time help investors. The new proposal will be reviewed for the next few months. Let’s see how the present structure helps all the stakeholders.”
It remains to be seen how the industry reacts to the new norms and what strategy they adopt while selling close ended equity schemes as dozens of offer documents have already been filed with the regulator.