Fund houses lure distributors with gifts

DVD players, trips to exotic southeast Asia, premium Swiss knives and refrigerators. These are some of the incentives being offered by fund houses to their distributors for meeting targets.

The incentives vary with the size of the fund house as well as the distributor concerned.

A leading fund house, promoted by a corporate, is offering DVD players to its distributors for every Rs five crore they mop up for the fund.

Though the prices of DVD and VCD players have crashed, these consumer electronics items figure high on every middle class homes' aspirations and distributors are bending over backwards to accommodate their clients.

Smaller fund houses catered to by smaller distributors have to be content handing out Swiss knives and lower versions of personal digital assistants.

Most of the time the money spent on incentives has to be subsidised by the asset management company (AMC) concerned.

The large-scale incentivisation means fund houses cannot restrict their expense ratio within the limits set by the Securities and Exchange Board of India's (Sebi's) mutual fund regulations and the concerned AMC foots the bill.

While there is nothing irregular about such incentives, industry watchers describe it as "soliciting business through unfair and unethical practices." This is because the distributors already get a commission on sales made by them.

Recently, Sebi asked a mutual fund house to explain the incentives being offered to its distributors and how it was expensing it.

Globally, it may be recalled, fund houses have been pulled up by the relevant regulatory authorities for resorting to such means to mop up funds.

Fund houses have also joined hands with distributors and provident fund managers to bring in funds from the latter.

Trail commissions on debt funds have been increasing and vary between 50 to 70 basis points compared to 40 to 50 basis points earlier. Trail is the commission paid by fund houses to brokers on an ongoing basis to keep the money coming in.

Trail commission on equity funds are, however, going down as equity schemes are not very attractive due to the downturn in the stock market. It now varies between 70 to 75 basis points compared to 70 to 100 basis points earlier.

While larger fund houses have taken the lead in reducing trails, the rest of the sector is also following suit.