Investors will no longer be charged a 2.25 per cent distribution commission up front by mutual funds beginning tomorrow following a Sebi directive.
Market regulator Securities and Exchange Board of India (Sebi) recently said that "there shall be no entry load for schemes, existing or new", a directive that has forced the mutual funds industry to gear up for a new fee structure from August 1.
Association of Mutual Funds in India (AMFI) Chairman A P Kurian told PTI that "it is a new system. It is investor-centric. All three stakeholders — distributors, fund houses and investors — will have to adjust to the new system".
Currently, as much as 85-90 per cent of the industry's business is generated through distributors, Kurian said.
Taurus Mutual Fund CEO Waqar Naqvi said the new system is good from the investor point of view but not so for the fund houses.
"People will take time to reconcile to the new structure. The fund flow to the industry could get affected over the next three months," he said.
According to him, though the size of the MF industry at present is about Rs 6,00,000 crore, the total profit of asset management companies together is only about Rs 550 crore.
There is a regulatory cap on expenses that a fund house can incur in a year. There is a cap on earnings. The fund houses can make money only by increasing volumes. But the new fee structure would affect the aggressive plans of fund houses to penetrate the market, Naqvi said.
Asked whether collections would now fall given that distributors would not have any incentive to sell mutual fund products, Kurian said initially there could be some problems but over a period of time, the industry would get adjusted to the new system.
Each mutual fund will formulate its own strategy, he said, adding investors would need to be educated about the new fee structure.
There are an estimated 1-lakh distributors pan-India, and according to AMFI, 85-90 per cent of the collection of the mutual fund industry is through distributors.
The practice of charging distribution commission has been in existence since more than a decade and the industry feels this has helped in considerably growing its business.
The implications of the new rule are considerable as distributors will now not have any incentive to push mutual fund products and investors may not be inclined to pay distributors separately for advice.
Given that Sebi's new measure would come into effect from August 1, several mutual funds launched their new offerings in July itself to avoid being hit by the new rule.
At present, there are as many as six New Fund Offerings (NFO) being marketed. Of these, three NFOs would end on July 31 and the rest in August.
Meanwhile, ICICIdirect, one of the largest financial product distributors in India and the first one to revise its commissions on funds post SEBI's directive, has announced that it has waived off transaction fees for its HNI (high networth individual) mutual funds customers.
As per the new fee structure, there will be no commissions for customers with cumulative MF investment of more than Rs 8 lakh.
However, customers with cumulative investments of less than Rs 8 lakh will have to pay nominal fees of Rs 30 per SIP (Systematic investment Plan).
Vineet Arora, senior vice-president and head (product & distribution), ICICI Securities, said: "We welcome the Sebi guidelines on removal of the mutual fund entry load and we believe that it will immensely benefit our customers in allocating their funds appropriately."
Given that the new rule is here to stay with Sebi ignoring the protests by distributors and the courts refusing to accept the pleas made by them.
However, all is not lost for the distributors. Fund houses would still be able to charge an exit load of one per cent when investors sell their investment. And fund houses would also compensate distributors through trail commission (a commission that depends upon the duration an investor stays in a scheme), he said.
