Distributors are keen to push MIPs due to upfront commissions offered by fund houses and the investor’s appetite for regular income

After market watchdog Securities and Exchange Board of India (SEBI) cracked down on upfront commissions, mutual funds (MFs) have started pushing monthly income plans (MIPs). Income funds recorded a huge Rs1.77 lakh crore of inflows in the month of April 2010 while equity schemes saw an outflow of Rs1,333 crore.

MIPs guarantee a regular flow of monthly income with minimal exposure towards equity. These schemes carry 1% exit load if redeemed before one year. These funds have 70%-90% exposure towards debt and 10%-30% in equity.  

According to sources, fund houses are offering 1%-1.5% upfront commission under MIPs.

"There is an appetite for it. Since the equity markets have turned choppy there was a need for regular income products. There is a demand for such funds. So there is a pull factor. Commission is not an only factor. Even ELSS schemes offered as high as 2.50% commission but if you see the sale of ELSS schemes of all MFs it won't be more than Rs150 crore," said a top official from a leading fund house.

Fund houses were offering 2%-4% upfront commission under equity-linked saving schemes (ELSS). ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses were passing on the commission in advance.

Earlier, equity schemes offered 2.25% upfront commission and 0.25% was deducted as service tax.

Sources indicate that distributors are not offering any pass-backs to investors under MIPs. The reasoning is that there is no upfront commission granted now.  

"Many distributors have sold MIPs from the last six to eight months very aggressively. Investors sometime compare MIPs to post office schemes but the returns can sometime be negative," said a Mumbai-based financial advisor.

The regulator had banned entry loads in August 2009. But fund houses had the leeway to offer commission from their own profit & loss accounts. SEBI in its circular dated 15 March 2010 had mandated fund houses not to deduct commissions from fund expenses. MIPs are currently allowed to charge a maximum of 2.5% as annual recurring expenses. AMCs were paying upfront commissions which included trail of either one to three years or after negotiating the terms with the distributor.