Faced with net outflows from equity schemes, some leading Indian mutual fund (MF) houses are indirectly funding contests for agents of big distributors that promise upfront incentives for each systematic investment plan (SIP) application.
Since April, equity schemes of MF houses have seen a net outflow of Rs 17,534 crore, data on the Association of Mutual Funds in India website show. More than half this outflow was in the three months ended November 30.
“Mutual funds are forced to pay upfront incentives to top distributors to garner equity assets,” said a sector official, on condition of anonymity. “To avoid the regulatory scanner, the contests run by distributors for their agents are indirectly funded by MF houses. This is done by various ways, like giving an advertisement in the magazine or website run by the distributors.”
A New Delhi-based leading MF distributor is presently running one such contest for its agents. For fresh equity SIPs of Rs 1,000-1,999 and having tenures of three or more years, the distributor is offering Rs 130 per application. For an equity SIP of more than Rs 2,000 and tenures of three or more years, he is giving Rs 300 per application.
In another contest for schemes of an MF house sponsored by a South Korean financial services company, the same distributor is offering Rs 200 per SIP application of Rs 1,000 having a tenure of 24 months to as much as Rs 5,000 per SIP application of Rs 10,000 with a tenure of 60 months.
In one of the terms of the contest, the distributor has mentioned that in case the SIP is discontinued, the incentive will be reversed and recovered from the ongoing brokerage. “However, generally, if the SIP continues for an year, the distributor doesn’t reverse the incentive,” said an official working for an MF distributor.
This per-application incentive is in addition to the upfront and trail commissions of about 1.5 per cent to 1.75 per cent given to the agents.
The Securities and Exchange Board of India had last year banned the entry load on MF schemes. After that, MF houses have to pay all upfront incentives and commissions to distributors from their own pockets. Before the ban, fund houses used to charge about 2.25 per cent load on equity schemes and pass these on as commission to distributors.
