| If distributors are the ones pulling in investors, the issue is whether Sebi's proposal will lead to a slowing down of investments in the sector. |
| Ajit Dayal, Director, Quantum AMC |
| Sebi has landed the first punch on the flawed distribution system for mutual fund products. The responses from the mutual fund industry are predictable. The distributors are scaring the regulators and the ministry of finance that the mobilisation of savings to fund India's planned 9 per cent GDP growth will be in jeopardy. If no entry loads are paid by investors on direct subscriptions, the distributors will have to shut down many of their 500 branches. This, they argue, will affect the inflows of assets into the mutual funds. These funds, in turn, will have less money to invest in the companies and their ambitious capex plans. It all sounds so logical, till the facts are laid out. |
| The entrenched distribution channels include local and foreign banks, local and foreign brokers, corporate distributors and individual distributors. The press has already written about how the distributors are given special prizes and rewards to gather assets. These free cars and holidays to exotic places are mostly funded by the "entry loads" and "initial issue expenses" that are charged to the retail investors to enter a fund. |
| The distribution companies are no fools. They set up these extensive branch networks so that they could push bad products and take good money from gullible investors. The top 10 cities still account for 80 per cent of the money flows into mutual funds. So the argument that there was a national distribution chain in place is not true. The malpractices have been stopped just in time, before they hurt investors across India. |
| The mutual fund houses have not welcomed this move. The truth is that many mutual fund houses have fallen prey to the power of the distribution channel. Sebi's grant of a licence to create an Asset Management Company has actually inspired a race to set up the largest Asset Gathering Company. |
| Mutual fund houses argue that insurance companies pay an even higher commission to their agents. They argue that money flows will be further diverted away from mutual funds to the insurance companies. But two wrongs do not make a right. The churning of client portfolios for trail commissions and for generating new entry load incentives is downright dishonest and immoral. We do not grudge anyone getting a free holiday or a free car. But these rewards skew the system: did the distributor work for the client or for his own self-interest? Investors' money should find its way into funds that meet their risk-return needs, not into mutual funds that give the best holiday package for a distributor. |
| We are clear that ethical business practices must stay at the forefront and we are honoured that, as the 29th mutual fund house in the country, we had the courage to challenge the distribution system two years before the regulators decided to take the first step in what we believe is a necessary journey. The Sebi proposal is a much diluted version of what the law should be, but it is a good start. --------------------------------------------------------------- |
| Nirmal Jain, CMD, India Infoline |
| While the intention behind the proposal to do away with entry loads if investors approach AMCs directly may be good, the outcome may be quite different from what has been envisaged. Doing away with entry load for direct investments would mean differential pricing for customers who approach the fund house directly versus those who don't. This will lead to confusion and will upset investors who have invested via distributors. |
| Variable entry load may be a good idea in principle but such unbundling of services is too premature for a market like India. In case Sebi wants to unbundle services, then it can do away with entry load for all mutual fund applications whether submitted through distributors or not. Let the distributor/advisor charge fees for their research and advisory services. Then the system will become transparent to the investors. A recent survey of Indian investors revealed that only 1.6 per cent of the earning populace in India invested in mutual funds "" this, in markets that have done so well, and despite it being well known that small investors are better off if they invest through mutual funds. |
| The variable entry load may seem like the trigger for the veritable "Big Bang" for mutual fund investing in India to the regulators, but to my mind, it is a move which is too early and may cause confusion and chaos amongst retail investors. The market, in its current stage of growth, needs more 'boosts', not curbs and confusion-causing measures. It is an interesting paradox that while distributors and mutual funds alike, in a 'super-regulated' industry, are falling in line with the rules laid down by Sebi and AMFI, items which constitute a bigger pie of investors' savings are completely unregulated and hence 'super-rebated' "" and the list keeps getting longer. |
| Take housing. How many projects do you know of which do not throw in freebies like 'free stamp duty' or 'free dining set' with a purchase in their latest housing project? Or how many automobile companies are you aware of which do not offer 'extended warranty' or free 'top-of-the-line' car stereo if you make the purchase within a particular period? Chances are, none. The move against rebating assumes that because of rebates, investors will be lured into buying schemes which may be non-performers. But the regulators seem to be more concerned with regulating than with ensuring the growth of the industry and of the habit of mutual fund investing. The industry is already subject to regular disclosures and hence, doesn't seem to need more in terms of regulations. So, to my mind, there are two alternatives:
|
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
