After Rs1,365 crore of outflows in April 2011, mutual funds have recorded Rs1,480 crore of inflows in May 2011—almost 94% of this amount was from existing schemes

Indian equity funds have recorded a surprisingly robust performance in May.

This huge positive inflow belies the mood prevailing among investors and the marketplace. The Sensex has fallen by 11% (since January to June 2011) and Foreign Institutional Investors (FIIs) have not been investing much in India.

One of the reasons for the net inflows in the last month may be because mutual fund houses are leaving no stone unturned to keep distributors in good humour. Asset Management Companies (AMCs) are paying a higher upfront fee to distribution subsidiaries of foreign and private banks nowadays to drive 'exclusive sales' of their schemes, mainly equity schemes. This commission is in addition to the upfront and annual trail fees that mutual funds pay distributors for selling their schemes.

AMCs are paying large distributors anywhere between Rs50 lakh and Rs2 crore this year as part of the so-called "marketing support" fees. Last year, such payout was in the range of Rs45 lakh to Rs75 lakh. Fund houses said that distributors, who have been deprived of the entry load after its ban since August 2009, are demanding a higher fee, citing difficulty in selling equity schemes in unfavourable market conditions. The marketing support fee would depend on the size of the fund house and performance of the equity scheme. Fund houses with large asset bases, performing funds and good credentials will have to pay less. New and ailing fund houses will be required to pay higher fees.

Ever since the Securities and Exchange Board of India (SEBI) imposed a ban on entry loads, equity funds have suffered redemptions. We mentioned in our article dated 6 May 2011 (Huge mutual fund outflow points to a much deeper malaise) that the regulator needs to address the issue of distributor fees, to make AMCs adopt a better pricing system where the commissions are clear and no other payments to distributors allowed. For such a course correction, SEBI and the mutual fund industry, through the Association of Mutual Funds in India (AMFI), have to sit together. So far, AMFI has done a poor job of putting across the industry's views, which is one of the main reasons why SEBI took the decision without consulting it.