After much deliberation, the mutual fund industry is set to cap upfront commissions at 1% from April 15. The Association of Mutual Funds in India (Amfi) will come out with proper best-practice guidelines by next week. However, the quantum of trail commission still remains the bone of contention.
Fund houses have held a series of meetings with Amfi, but no clear answer has been found on the trail commission issue. A CEO of top fund house said on condition of anonymity: “While we might cap upfront commissions at 1%, there is no clarity on trail commissions. There are two arguments; one is to give trail commission at 1-1.5% and, another, to give trail and upfront at one go.”
However, he added, the second option was unlikely to be taken as that might lead to higher churning. Trial commission is paid to the distributor as long as an investor stays invested.
Over the last few months, Sebi has had several rounds of discussion with mutual found houses on upfront commission. Sebi chief UK Sinha has expressed discomfort over high upfront commissions.
On Friday, Sinha said: “Sebi would hesitate to directly prescribe the commission and would be happy if the industry does it. If a disproportionately large amount of commission is being paid, and certain anomalies have crept up, Sebi is uncomfortable.”
In the last few months, fund houses have come out with various new fund offers (NFOs) to ride the surge in the equity market. However, several fund houses were found giving upfront commissions as high as 5-7% on equity, equity linked saving schemes (ELSS) and closed-ended equity schemes to distributors.
A marketing officer from a leading fund house who attended the meeting with Amfi said, “The main aim of capping upfront commission and giving higher trail commission is to stop mis-selling. If these proposals are accepted, it will be a win-win situation for fund house, distributors and investors.”
‘Will clear hurdles from REIT path’
Hopeful that the Real Estate Investment Trusts (REITs) will eventually make it big in India, Sinha said there is a need to look into the reasons why there has been “very little enthusiasm” so far in this market. “If there is an informed advice that Sebi needs to do something, we’ll be more than willing,” he said.