General (non-banking) distributors of mutual fund schemes are up in arms against the recent Sebi directive, giving investors the right to negotiate
commissions while buying MF products through them. As a mark of protest, some mutual fund agents’ associations have decided to boycott sale of MF products starting July. These associations are also likely to file a writ petition against the Sebi ruling. Prominent among these are MF associations from Aurangabad, Akola, Amaravati, Nagpur, Nasik and Chennai. Industry observers say the move will hurt smaller distributors more, as the larger players will find ways to circumvent the Sebi ruling. “Investors in Tier-II and Tier-III cities are not mature enough to understand the worth of the advice given by a MF distributor, hence it will be difficult to convince him to pay a commission for the same,” according to Mukesh Chothani, president, Nasik ARN Agent Association. “The (Sebi) ruling will make our task of collecting advisory fees almost impossible. We would be better off selling insurance and post office products.”
Till last week, investors buying mutual fund units through a distributor were subject to an entry load of 2.25% — the margin that asset management companies pay distributors for bringing in business.
Last year, Sebi abolished entry load for those investors who purchased mutual fund units directly from fund houses. This, however, evoked a tepid response with 95% of the applications received by AMCs coming through the distribution network.
With Sebi banning entry loads altogether last week, the commission payable to a distributor will now be mutually agreed upon by the investor and the distributor.
This raises another concern for the general distributors that if a scheme recommended by them fails to perform, there is a fair chance that some angry investors may drag them to consumer courts as they would be bound by a contract with the investor who has directly paid them a commission. Also, as the AMCs are liable to pay service tax on commissions to distributors, this ruling raises concern on the loss of revenue to the government. Not all agents can be expected to pay the service tax loyally to the exchequer.
The impact of the Sebi ruling is being felt not only by the MF distributors but also by the MF houses (AMCs) who foresee an adverse impact on their expansion plans. “The MF industry is currently aiming to increase its retail penetration and this involves cost. An entry load does help to partially fund this ambition and thus must be seen as a marginal charge in the context of potential returns from this asset class over the medium- to long-term,” says Ajay Srinivasan, chief executive - financial services, Aditya Birla Group.
“However, the recent Sebi announcement has raised questions on the practicality of these expansion plans. It is also important to note that even products like RBI bonds and fixed deposits have an upfront distribution charge,” he added.
The MF industry is already struggling to keep pace with the ever expanding insurance industry whose products like unit-linked investment plans are similar to MF products, but fetch a much higher commission for distributors.
However, Sebi chairman CB Bhave clarified recently that the onus of convincing the investor that an MF product is far more cost effective than an insurance product lies with the MF industry only.
commissions while buying MF products through them. As a mark of protest, some mutual fund agents’ associations have decided to boycott sale of MF products starting July. These associations are also likely to file a writ petition against the Sebi ruling. Prominent among these are MF associations from Aurangabad, Akola, Amaravati, Nagpur, Nasik and Chennai. Industry observers say the move will hurt smaller distributors more, as the larger players will find ways to circumvent the Sebi ruling. “Investors in Tier-II and Tier-III cities are not mature enough to understand the worth of the advice given by a MF distributor, hence it will be difficult to convince him to pay a commission for the same,” according to Mukesh Chothani, president, Nasik ARN Agent Association. “The (Sebi) ruling will make our task of collecting advisory fees almost impossible. We would be better off selling insurance and post office products.”
Till last week, investors buying mutual fund units through a distributor were subject to an entry load of 2.25% — the margin that asset management companies pay distributors for bringing in business.
Last year, Sebi abolished entry load for those investors who purchased mutual fund units directly from fund houses. This, however, evoked a tepid response with 95% of the applications received by AMCs coming through the distribution network.
With Sebi banning entry loads altogether last week, the commission payable to a distributor will now be mutually agreed upon by the investor and the distributor.
This raises another concern for the general distributors that if a scheme recommended by them fails to perform, there is a fair chance that some angry investors may drag them to consumer courts as they would be bound by a contract with the investor who has directly paid them a commission. Also, as the AMCs are liable to pay service tax on commissions to distributors, this ruling raises concern on the loss of revenue to the government. Not all agents can be expected to pay the service tax loyally to the exchequer.
The impact of the Sebi ruling is being felt not only by the MF distributors but also by the MF houses (AMCs) who foresee an adverse impact on their expansion plans. “The MF industry is currently aiming to increase its retail penetration and this involves cost. An entry load does help to partially fund this ambition and thus must be seen as a marginal charge in the context of potential returns from this asset class over the medium- to long-term,” says Ajay Srinivasan, chief executive - financial services, Aditya Birla Group.
“However, the recent Sebi announcement has raised questions on the practicality of these expansion plans. It is also important to note that even products like RBI bonds and fixed deposits have an upfront distribution charge,” he added.
The MF industry is already struggling to keep pace with the ever expanding insurance industry whose products like unit-linked investment plans are similar to MF products, but fetch a much higher commission for distributors.
However, Sebi chairman CB Bhave clarified recently that the onus of convincing the investor that an MF product is far more cost effective than an insurance product lies with the MF industry only.
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