New fund offers of the Rajiv Gandhi Equity Savings Scheme are seeing applications being made as high as Rs10 lakh, much of this is attributed to the high commissions paid to distributors. However, the regulator continues to remain silent
Many fund houses which have launched Rajiv Gandhi Equity Savings Schemes (RGESSs) are paying as much as 6% commissions to distributors, who, attracted by high commissions are pitching the schemes to high net worth individuals (HNIs).
RGESS is meant for new investors who have an annual income of less than Rs10 lakh. These investors would get a tax deduction of 50% of the investment up to a maximum deduction of Rs25,000. However, it is seen that investments as high as Rs10 lakh and more are being invested in the last few days of the New Fund Offers (NFO) of RGESS. This clearly shows that distributors are promoting these schemes to high net worth clients and the sole reason for this is that distributors are getting large commissions, making a mockery of the RGESS.
Fund houses probably feel they will only be able to attract investors if they promote their schemes by paying a significant upfront commission. With almost every fund house launching an RGESS mutual fund scheme, some fund houses are paying a huge commission to ensure that their scheme is pitched first. Hence, to earn a higher income, distributors would naturally pitch the schemes of fund houses paying a higher commission. However, some unscrupulous distributors are probably looking to take advantage of this high commission and pitching the product to high networth clients seeking big ticket applications.
The Securities and Exchange Board of India (SEBI) was contemplating scrapping this commission paid to distributors last year, however, it changed its mind as it could not reach a consensus with the mutual fund industry body—Association of Mutual Funds in India (AMFI).
New fund offers had dried up over the previous year, hence, this issue had not cropped up. With the rush for RGESS NFOs, high upfront commission is again creating an issue which the regulator needs to address. However, banning upfront commission would lead honest distributors to abandon the mutual fund industry altogether and move to other investment products that pay a higher commission. The regulator would need to set a limit to the upfront commission being paid or set a fixed upfront commission which would be the same for every scheme. By doing this, the distributor would not get any benefit for promoting one scheme over the other as the commission would be the same. We wonder why the regulator has not done this as yet.
Way back in August 2009, entry load was banned in order to curb mis-selling, however, an upfront commission paid to distributors still continues. Fund houses on an average pay an upfront commission of 1.50% to 2.50% to the distributors. The upfront commission paid is an additional sum of money that fund houses pay to distributors from their own accounts and not from the corpus of the scheme. Therefore, the investors’ investment corpus remains unaffected and only the expense ratio is allowed to be charged. The issue with upfront commission is that it leads to mis-selling and excessive churning by distributors looking to earn a quick buck.
It’s not that HNIs cannot invest in this scheme, but the big question is—why would they invest such huge amounts in a scheme which has no track record? Even if they are new investors looking for a tax rebate, the minimum they could invest is Rs50,000 to get a Rs25,000 rebate. However, it seems like some distributors have managed to get their clients to invest huge amounts in these schemes.
Some distributors feel that this issue is being blown out of proportion, as even in Equity Linked Savings Schemes (ELSS) where the upfront commission has been similar, investors put in over and above the Rs1 lakh limit available for income tax deduction. But the difference is that ELSSs have a track record. Getting an investor to invest in a scheme with no track record just to earn a high commission is nothing but mis-selling.
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It is just like a "FREE PRESS" can turn matters to suit his/her comfort zone and so on and on.
My fundamental question here is it is out and out recommendation of all analysts to give due consideration to a (1) "process driven fund house" (2) "acknowledged and proven fund manager, (3) "A fund house whose maximum funds are not losing/bleeding, may not giving profits in a negetive market and so on and on again.
What is the harm if an investor is lured into an NFO, by a fund house which meets all above parameters and are closer to bench mark returns in each of their categories.
Also a fund that has a track record and has amassed huge corpus, can that perform as well as it has performed? In such cases fund houses are known to have closed selling of such funds. Why then should this be a taboo to sell an NFO from a well reputed and stable fund house.
Same analysts have been raising hue and cry all over spilling ink and wasting time and energy defending the IFAs who are losing their livelihoods and blaming SEBI for capping upfronts. If the same IFA is able to make some money somewhere why is it a EYESORE to these analysts is anybody's guess.
SUBBA RAO V. PALAPARTI
The solution lies in identifying & punishing the miscreants.
For the misdemeanor of a small fraction, please don't paint black the fraternity.
Also there is nothing stopping AMCs, AMFI or SEBI from rejecting such applications & refunding the investment amount.
If the AMCs are paying such a huge commission to distributors, should'nt the distributors use this amount to improve the penetration of this product by spreading awareness to attract first time investors?
Sadly some prefer getting HNIs to invest to earn a fatter commission.
Mobilisation commission is paid to distributors for sourcing business from existing and new clients. It is not mandatory to source investment from far off areas - Please do not float / incubate new 'hair-brained' ideas
Spreading awareness and market penetration is the responsibility of the regulator, AMFI & Fund Houses. - It is certainly not the responsibility of the existing distributors.
Moreover, it is nobody's business to tell mutual funds distributors how to spend their commission.
I am not referring to small distributors. There are big distributors, mostly banks, which which earn total commissions going up to crores.
Apart from the regulator, AMFI & Fund Houses, don't you feel they have a responsibility as well?
One also hears about money being switched from other mf schemes into RGESS - This is a blatant abuse as RGESS was meant to attract first time investors only.
NFOs are being extended for lack of response, rules are being bend to accommodate RGESS by extending the NFO period to one month from 15 days.
If one takes out the big ticket investments all RGESS NFO put together may not cross Rs.100 crores mobilisation - While BIG noises would continue to be made about retail participation into India Capital markets
All kinds of mis-selling seems to be acceptable to earn brownie points from powers that be.
And last but not the least.
Those who were party to the decision of 'Low-cost-direct-option' must be given responsibility for getting in meaningful numbers in RGESS under the low cost option. . . Or should be shunted out of the mutual funds advisory committee set up for the revival of mutual funds in India.