Coming to a Screen near You

In a move that fund companies say 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 stockbrokers off their trading screens. The fund units will be lodged in the demat accounts of unit-holders.

Currently, trading in stocks is compulsorily in dematerialised form, while mutual funds are sold through large nationwide distributors, like banks, and also small independent financial advisors. A top official of one of the largest Indian mutual funds told Moneylife that SEBI wants to encourage the fund industry to take the stocks route (exchange-broker-demat).

In July, SEBI banned entry loads that distributors used to get for pushing funds. The entry load, which ran as high as 6%, used to come from the corpus of the fund itself. SEBI has now mandated that investors have to pay the distributors directly for the services they get and it is between them to negotiate what those services are and how much they should pay. 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), have been left high and dry after the regulator abolished the load.

Mutual fund companies have kept their show going by paying out 0.5% commission to advisors from their own fees; the larger distributors are being paid 1%. Some, like JM Financial Asset Management which have a poor long-term performance record, are even paying as much as 1.5% as upfront load plus 1% brokerage on systematic investment plans (SIPs) and systematic transfer plans (STPs). Such a steep payout will affect the profitability as well as long-term survival of the asset management company (AMC). Under the circumstances, the fund industry is even more focused on large corporate investments and has no interest in incurring the high cost of servicing retail investors. After the AMFI (Association of Mutual Funds in India) general body meeting held in early October, it seems that fund companies have completely fallen in line with the regulations. It remains to be seen what the smaller fund companies will do.
SEBI’s latest view—of putting funds on the demat platform—is likely to be welcomed by fund companies which used to be powerless against 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 too much 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 1,500 towns at one go, through the broking network.” However, the CEO of another fund company is sceptical about how far the new idea will help. According to him, funds can never be sold like stocks. They can only be sold by a different set of intermediaries, like distributors.

Meanwhile, on their own, mutual funds have no strategy now to combat SEBI’s order. At the AMFI general body meeting, members were supposed to discuss a representation to SEBI. But the meeting ended with no clear action plan. The AMFI meeting, which lasted several hours, saw members agitated about the directive but it led to nothing. One of the suggestions was to set up a committee to take up the issue with SEBI. However, by the end of the meeting, members decided that the committee would be a futile effort, given SEBI’s strong stance on the issue. When contacted by Moneylife, AP Kurian, chairman, AMFI, refused to comment on the proceedings of the meeting claiming them to be an ‘internal matter’. 

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