Sebi targets NFO mis-selling with new rule to prevent portfolio churn

Regulator puts an end to switching of funds by distributors for higher NFO commissions

The Securities and Exchange Board of India (Sebi) has introduced a new rule aimed at putting a stop to unnecessary portfolio churn by distributors to pocket higher commissions, amid rising asset mobilisation through the new fund offer (NFO) route.

 

Under the new guidelines, distributors will no longer earn higher commissions for switching existing investments to NFOs.

 

"To address the issue of possible mis-selling in NFOs, for switch transactions, the distributor shall be entitled to the lower of the two commissions offered under the two schemes of the switch transaction," Sebi said in a statement issued after its Board meeting on Wednesday.

 

 

Mutual Funds (MFs) offer a switch option where investors can directly transfer funds from one scheme to another as opposed to redeeming the investments, and then putting that into the new scheme.

 

"This tackles the issue of mis-selling, where distributors encourage investors to move from existing funds to NFOs just for higher commissions. The trend of shifting from existing mutual funds to NFOs has mostly been observed for regular plans," said Feroze Azeez, Deputy CEO, Anand Rathi Wealth.

 

According to experts, as the new rule is limited only to switch transactions, it will be effective in curtailing mis-selling to some extent.

 

"The 'switch' route is preferred by distributors while shifting money from one fund to another. In the other option i.e., redeeming and then investing, there are chances of investors refusing to invest after getting the money in their bank account. An informed investor may also ask for the rationale for not switching directly," said G Pradeepkumar, a former senior MF executive.

 

Several asset management companies (AMCs) have already implemented this rule for switch transactions. However, it was limited to equity schemes.

 

"This rule has already been implemented by several AMCs for switch transactions involving equity schemes. However, now switches from debt funds to equity funds will also come under this," said Mohit Gang, Co-Founder & CEO, Moneyfront.

 

Sebi has also made it mandatory for fund houses to deploy the NFO proceeds in a timely manner.

 

Experts say the objective is to ensure fund houses launch schemes considering the market condition and only collect the amount they can deploy.

 

"Introducing a timeline of 30 days for fund managers to deploy the money raised during an NFO, Sebi is making sure that AMCs only collect what they can actually invest within a reasonable period," said Azeez.

 

"The right time to collect money through NFOs may not also be the right time to invest. The fixed timeline for deployment will likely force AMCs to launch products keeping the investor interest in mind," said an MF official.