In a move that will change the mutual fund distribution game, the Securities and Exchange Board of India (SEBI) is likely to ensure that mutual funds are sold by stock brokers off their trading screens. The fund units will be lodged in the demat accounts of unitholders.
Currently, secondary market trading in stocks is compulsorily in dematerialized form, while mutual funds are sold through large nationwide distributors like banks and also small independent financial advisors. A top official in one of the largest Indian mutual funds told Moneylife that SEBI wants to encourage the fund industry to take the stock route (exchange-broker-demat) to resolve the problems of fund companies following SEBI's decision to ban entry loads that distributors used to get for pushing funds.
The entry load, which ran as high as 6%, used to come from the fund corpus itself. Ever since SEBI enacted this rule, new Fund Offerings (NFOs) are down to a trickle, despite the Sensex having climbed more than 120% since early March. The distributors, especially Independent Financial Advisors (IFAs), too have been left high and dry after the regulator abolished the load.
SEBI has been saying investors have to pay the distributors directly for the services they get and it is between them to negotiate what those services are how much to pay. SEBI’s latest thinking is likely to be welcomed by the fund companies which used to be powerless in front of large distributors like banks.
“Often distributors would recommend a fund to investors on which they earned a fatter commission, not the ones that are best-suited for the investors” says the Chief Investment Officer of the one of the top five fund houses.
“The balance of power was much too against us. SEBI’s move had rightly changed the balance of power. The distributor network remains important to us. But we would certainly welcome a move that allows us to reach 1500 towns at one go, through the broking network.” - [email protected]