Market regulator Securities and Exchange Board of India (Sebi) is set to announce guidelines to control upfront commissions in mutual funds. It is likely that the regulator might cap upfront commissions to around 1.5-2 % for all equity schemes (open-ended as well as closed-ended schemes). Apart from that, mutual funds might get another set of colours for schemes to gauge their risk.
At the Mutual Fund Advisory Committee meeting, which was scheduled on Monday by Sebi, various steps to control the upfront commission issue in the industry were discussed. A member of the committee, on condition of anonymity, said: “We had a prolonged discussions on steps to reduce the mis-selling of mutual funds in the industry. Soon, we might get some proper guidelines by the regulator regarding the upfront commission issue.”
The market regulator might put a cap on the maximum amount of commission to be paid upfront. “They might regulate what amount should be paid upfront and what should be the trail commission. The regulator would also ask fund houses to put the amount of commissions payed to the distributor on their websites. However, it is very unlikely that it would reduce the expense ratio,” said a member who attended the meeting.
In general, many fund houses pay 2-3% of upfront commissions on their equity schemes and continue to pay trail commission of around 0.50-0.75% as long as the investor stays invested in the scheme.
However, in the past few months many fund houses had started launching close ended equity schemes and were paying upfront commission of over 6-7%, which had raised concerns for the regulator. During the annual general meeting of Association of Mutual Funds in India (Amfi) in September, Sebi chief UK Sinha had expressed his discomfort with such high upfront commissions.
Last week, Sinha had invited CEOs of the top fund houses to discuss the issue and had heard what were the concerns of the fund houses. “Even at that meeting there was no uniform voice among industry. Some fund houses wanted to completely ban upfront commissions while some argued that without upfront commissions, mutual fund products would get ‘killed’.
The Sebi chief listened to all the concerns of the industry. Hope we receive some good news which might stop mis-sellling in the industry,” said a CEO of a mid size fund house who had attended the meeting last week.
Among other issues which were also discussed at the meeting was that the regulator might bring in another two colour’s for product labelling which will be included in the application form to know the risk profile of that particular scheme. Currently, there are three colour’s to identify the risk associated with that scheme.
Chirag Madia