Advisors urge caution as state-owned banks push group's MF products

They say investors need to be wary if a bank-backed fund house has a limited product basket

Banking customers, especially those belonging to state-owned banks, are most likely to be urged by the the lenders' sales teams to invest in mutual fund (MF) products of the bank-sponsored fund house.

According to data collated by Prime Database, PSU banks such as Canara Bank, Union Bank, State Bank of India, Bank of Baroda and IDBI Bank (classified recently as private bank), earned 70-100 per cent of their distribution income selling MF products of their mutual fund subsidiaries.

MF advisors say that the practice may not be always in the best interests of the investors. "Customers looking to buy MF products from banks should be extra-cautious. There is a chance of mis-selling, especially if the bank-sponsored fund house has a limited product basket," said Srikanth Matrubhai, chief executive officer of Sri Kavi Wealth.

Among PSU banks, SBI received Rs 487 crore in distributor commissions in 2018-2019, almost 98 per cent of which came from selling  products of fund houses it is associated with. SBI is a sponsorer for SBI MF and also one of the sponsorers of UTI MF. However, experts added that given SBI MF's wide product basket, a proper risk-profiling could lead its customers to a suitable product that meets their investment needs.

Meanwhile, Canara Bank got almost all its commission proceeds of Rs 47.69 crore selling MF products of Canara Robeco MF, where the bank is a co-sponsor.  

Other state-owned banks showed a similar trend. Union Bank earned 98.7 per cent of its Rs 18 crore distribution income selling Union MF's products. Bank of Baroda got 86.5 per cent (Rs 18.3 crore) selling products of fund houses it is associated with. Bank of Baroda is the sponsorer in Baroda MF and one of the four PSU promoters in UTI MF.

In IDBI Bank's case, 71.13 per cent of the distribution proceeds (Rs 31.19 crore) was received from selling IDBI MF products.

Among some of the private banks, the share from selling group MF products is high, but lower than state-owned banks. For instance, Axis Bank earned Rs 310 crore of its distribution commissions selling products of Axis MF. It accounted for 55 per cent of the bank's entire commission proceeds of Rs 555 crore.

"First-time equity investors typically prefer an MF scheme from a brand they can trust. For such investors, the banking channel is often the first touch-point as they already have a relationship and are aware of the service," said senior executive of a fund house.

For ICICI Bank, 65 per cent or Rs 232 crore of its distribution commissions came from selling MF products of ICICI Prudential MF. The bank earned Rs 355 crore from distributing MF products in 2018-2019.

MF advisors add that an investor with too many schemes of the same fund house faces concentration risk. 
 

"New investors might feel comfortable with an MF product of their bank. However, it is not advisable to keep most of your financial assets, including MF investments, within the same group's financial entities. Also, lack of diversification can impact an investors' returns as fund houses go through some periods of scheme underperformance," said Amol Joshi, founder of Plan Rupee, a Mumbai-based independent financial advisor.