Funds rush to offer lollies

MFs are paying Rs 4,000-5,000 per Rs 1 cr in fresh investments.

The domestic mutual fund industry is tying itself up in knots to garner more subscriptions and boost its asset base. But in doing so, it is spawning a pervasive chain of "incentives."

Some mutual funds are said to be paying as much as Rs 4,000-5,000 per Rs 1 crore in fresh investments brought in the last 3-4 days of the month. The idea is to boost the assets under management at the end of the month.

Typically this money is withdrawn in the first week of the next month.

The other part of the initiative lies in ramping up subscriptions to initial public offers (IPOs). In this, the industry is egged on by the fund distributors""the entities that actually sell mutual fund products to the investor.

Market sources point out that almost 30 per cent of subscriptions to funds' initial public offers (IPO) is 'float money,' arranged by the distributors. The latter, on its own account or on behalf of high net worth investors, typically invest in the IPO but only for a month or so.

Thus, the distributor nets about 1.5 to 2 per cent as commission for selling the IPO. Besides, the distributor gets almost Rs 100 to Rs 250 per application as marketing costs, though this varies for different distributors, depending on their commitment. This tends to cover the cost of entry and/or exit loads.

Despite the mutual fund industry's claims of record subscriptions in fund IPOs, the industry's total assets under man agement have increased very nominally in the current financial year, by 7.24 per cent, from Rs 1.38 lakh crore in April 2004 to Rs 1.48 lakh crore in October 2004 despite collecting more than Rs 8,300 crore in new schemes during this period, according to Association of Mutual Funds (AMFI) data.

While no fund house is willing to comment on the matter, industry sources point out that the intention was honourable in the first place: to provide incentives to distributors to canvass larger retail participation. But some are misusing this. The amount in the IPO subscription is redeemed after a month to be utilised elsewhere-read for other fund schemes.

The fund house is happy starting off the scheme with a bang, and the distributor gets his commissions. Even at 1.5 per cent per month, the distributor gets to make a decent 18 per cent annually, just shuffling the money from one IPO to another.

Most distributors have an exclusive database of subscribers that 'apply' for such mutual fund IPOs. Mutual funds hand out bigger sops in north India and in Gujarat, where the distributors are 'tougher' to deal with, industry sources said.

In fact, some distributors cut deals with investors saying that they'll 'manage' their money for an assured return by investing in IPOs.

Said one such money manager, on condition of anonymity: "Even if we invest in one IPO per month, we tend to make almost 1.5 per cent on the investment."

The loser in the game is the small investor, as many distributors advise small investors to keep churning their money from one scheme to another. The distributors benefit from the higher commissions but in doing this they tend to 'incorrectly' advise investors on their investments.

Asset size fever

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• Mutual funds' total assets under management have risen 7.24 per cent in the current financial year
• They rose from Rs 1.38 lakh crore in April 2004 to Rs 1.48 lakh crore in October 2004
• During this period the funds collected more than Rs 8,300 crore in new schemes during the same period