Commission cap threatens to halt NFO gravy train

The Rs 12-lakh-crore domestic mutual fund sector has seen a record number of equity new fund offers (NFOs) in the past year. However, the capping of upfront commissions to distributors is likely to put brakes on such launches.

A circular issued by the Association of Mutual Funds in India has asked fund houses to cap upfront commissions to distributors at 100 basis points, effective April 1. This follows the Securities and Exchange Board of India (Sebi) expressing concern over high commissions paid in the case of certain NFOs. Fund houses were believed to be paying commissions of upto eight per cent to distributors for some close-ended funds with tenure of five years.

Equity NFOs, out of favour after the 2008 market meltdown, were back in vogue, thanks to a strong rally in the stock market and a push from distributors. In 2014, the mutual fund sector launched a record 75 equity offers, which helped asset management companies mop up Rs 12,200 crore.

Industry players say an encore in 2015 looks difficult. Those with an approval from the Securities and Exchange Board of India (Sebi) in place will be able to hit the market but might not be able to garner large sums if there is lack of support from distributors.

"I think there would be a lull in NFO launches this year. Lower commissions might not let distributors take interest," said Ajit Menon, executive vice-president, DSP Black Rock AMC.

Also, many fund houses are expected to scale back NFO launches to avoid regulatory ire.

Vikaas Sachdeva, chief executive of Edelweiss Mutual Fund, said, "New launches are the function of markets and investor appetite. If both these factors remain the way they are today, there might not be a slowdown in NFOs. But as distributors' commissions have been reduced, the situation could be different."

Experts believe though the mutual fund sector has achieved critical scale, its offerings remain "push products", unlike offerings by banks or insurance companies, which command an investor pull.

Of the 75 NFOs that hit the market in 2014, about 50 were close-ended products, with a lock-in period of up to five years. The amount mobilised by closed-end schemes accounted for about 80 per cent of the overall amount raised through NFOs.

Fund houses such as Sundaram MF, ICICI Pru AMC, Birla Sun Life AMC, Reliance MF and UTI MF were the key entities offering close-ended products to investors. Fund houses have justified close-ended offerings, saying equity investments give better returns if the tenure is more than three years.