Amfi told to pen alternative fee for fund offerings

The Securities and Exchange Board of India is miffed with the widespread mis-selling in mutual funds. The capital market regulator has directed the Association of Mutual Funds in India (Amfi) to come out with an alternative expense structure for new fund offerings.

This is aimed at ensuring that distributors do not unfairly oversell new fund offerings to clients, hurting investors in the process.

"We have asked Amfi to suggest an optimal fee/ commission structure for new fund offerings, failing which we will prescribe an alternative to curb churning. While some amount of churning is fine from the perspective of profit booking, the alarming rate of churning, especially, in equity funds is disturbing," said a top Sebi official.

Business Standard had reported yesterday that there is big churn happening in mutual funds. According to the Churning Report by a leading mutual fund registrar, 12 per cent of all equity and balanced fund purchases brokered by the top 20 distributors during 2004-05 were redeemed within a month. About 30 per cent were redeemed within three months and nearly 50 per cent within a year.

According to industry officials, the huge churn in mutual funds have been a consequence of a plethora of new fund launches. Distributors normally get double the amount as commissions on sale of new fund offerings.

While upfront commission for new fund offerings are about 4-5 per cent, the same on ongoing schemes is only around 2.25 per cent. Given the differential commission structure, distributors tend to push new fund offerings more.

Switching funds more often than required results in sub-optimal returns for investors.

Separately, there is also a need to look at the kind of forms/.agreements investors sign up with their advisors to see whether such fund switching decision are done with the due knowledge and permission of the clients, said the Sebi official.