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The report of the committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products has suggested various measures for the Mutual Funds in India. It includes recommendations in the fields of Product Structure, Cost and Commissions and Disclosures.
Following are the Committee's recommendations:
Product structure
1. The benchmarks should be made more relevant than they are today. Schemes should be periodically tested to see if the asset allocation is conforming to the benchmarks chosen.
2. Similar schemes from the same fund house should be removed. Some of these were launched in the NFO boom to harvest the 6 per cent marketing cost. Such duplicate funds should be merged with others in the same fund house since they confuse investors.
3. The regulator should ensure that the mutual funds are true to label. This means that the investment mandate in the information memorandum should be reflected in the active portfolio of the fund.
4. The regulator should consider measures to encourage retail participation in ETFs.
5. The regulator should put in place a free look policy and define the period for which it will hold.
Costs and commissions
1. The cost caps within a overall TER should not be fungible.
2. Upfronting of commissions should be totally removed. There is a current cap of 1 per cent that comes from the fund house capital or profits. This too should be removed.
3. Distribution commissions should only be paid as level or reducing AUM based trail. In the case of lumpsum investment, or upon termination of a systematic investment plan, the trail commission should be declining (or nil after a specified period of time).
4. The extra commission in B15 should be removed and a level playing field be created in the country. Manufacturers and distributors should on their own tap such unexplored markets to increase their sales and market share.
5. No category of mutual funds should be exempt from the zero upfront (when it is put in place).
6. Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital.
7. Competition has not reduced costs much below the expense ratio that was fixed when the AUM of the industry was much lower. The regulator should lower the cost caps as the AUM rises over time.
Disclosures
1. On no account should sales of new fund offers happen pitching the product as a “cheap” product that the investor is getting “at par” value of Rs.10. The regulator should impose heavy costs on distributors reported as doing this.
2. The past returns of the scheme being sold, along with the benchmark returns, should be disclosed to the investor at the time of sale. Customers should be disclosed a range of past returns appropriate to the product tenure and should include returns of last 6 months and annualised returns since inception, and 2 year rests thereafter.
3. Trail commissions on mutual funds should be disclosed at the time of sale.
4. Disclaimer presently talks of a scheme’s performance being subject to market risks. Customers should be informed that in addition to market risk, the performance is also subject to fund house/manager’s competence.
5. Any change in scheme fund manager should be disclosed to all investors.
6. The AUM rankings published by the AMCs on their websites, Information Memorandum etc. are presently combined for all products, thereby giving a misleading picture. For retail products, the AUM rankings should be shown only for the retail AUM.
