Source : http://epaper.dnaindia.com/
MFs stop commissions from own pocket | ||
May shift completely to trail commission model from Oct 1 | ||
Khyati Dharamsi &Sachin P Mampatta. Mumbai | ||
Your mutual fund distributor may soon begin advising you to stay invested in existing schemes rather than exit and enter new ones. Yes, it's the same guy who has always told you that churning pays like nothing else does. What gives? Well, for one, it doesn't pay him to get you to churn anymore. Several large mutual funds have stopped paying distributors upfront commissions out of their own pockets to get new customers into their schemes. These include HDFC, Canara Robeco, Franklin Templeton and Kotak Mahindra. SBI and Reliance mutual funds too are learnt to have stopped paying upfront commissions to distributors out of their pockets, though Sundeep Sikka, chief executive officer at Reliance Mutual Fund told DNA Money that "It is a scheme-specific issue... We are still paying small amounts." SBI, on the other hand, had not responded to a query sent on the matter at the time of going to print. Earlier, fund houses used to pay these commissions from the entry loads charged by them to customers. But the Securities and Exchange Board of India banned entry loads with effect from August 1, 2009. Following this, any fund that still wanted to pay upfront commissions to its distributors had to do so from its own pocket. Some fund houses did try this for a while, out of compulsion to garner customers and their monies, but the trend just couldn't have gone on forever. So now, the industry is shifting focus to trail commission, which is paid periodically to a distributor for his client's assets under the mutual fund's management. "It is not as if the distributor will not have any income. The trail commissions, which constitute a major portion of the income, will continue," said the chief executive officer of a fund house, requesting not to be named. "Most fund houses are going completely trail starting October 1," an industry official said on the condition of anonymity. And that is precisely the reason the distributor will now ask you to stop churning your portfolio. Earlier, a distributor would be paid 2.25% upfront commission from the entry load and 0.75% every year as trail commission on the assets he brought in. Considering an average 15% annual return on equity funds, the trail commission could account for more than half of the overall commission he received over a three-year period. Even so, upfront commissions were more attractive of the two as long as a distributor could get the investor to enter new schemes and thereby earn him more upfront commission. Now, with upfront commissions out of the way, trail commissions have become the primary incentive. And the longer an investor stays with a fund, the bigger the amount of commission the distributor stands to earn. Distributor reaction on the issue appears to be mixed, going by industry officials. Some may be appeased by the fact that trail commissions themselves are headed higher with some fund houses giving as much as 1% or more compared with 0.75% earlier. |
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