MFs may exclude SIPs from upfront fee restrictions

MUMBAI: Retail investors will soon start getting calls from mutual fund advisors, after a brief gap, to invest money in equity schemes. And, they are likely to aggressively push the systematic investment plans (SIPs) – the widely recommended road to invest in equity mutual funds.

Mutual funds may take a U-turn on the recent decision to limit upfront commissions to distributors, a move that was aimed to check misselling. The industry plans to exclude the systematic investment plans (SIPs) from restrictions on upfront fees to distributors, while it increases the initial commission pay-out to these intermediaries.

The move to ease the upfront fee restrictions, in less than two months after their introduction, comes in the wake of worries about declining fresh sales after bumper inflows in the last one year. Mutual fund officials said the proposals would be considered in the next meeting by the Association of Mutual Funds of India ( Amfi), the industry’s trade body, in the first week of June.

“There will be 4-5 proposals (on upfront commission) that will be tabled in the meeting. The indications are that most of them will be approved because they have the backing of the top funds,” said a mutual fund industry official familiar with the development.

One of the key proposals is to keep SIPs out of the restrictions. In systematic investment plans, investors give mutual funds a mandate to invest a pre-determined amount every month or quarter for a certain period. If Amfi clears the proposal, distributors could receive upfront the entire fee that they are expected to get during the SIP tenure.

Another proposal is to allow mutual funds to pay distributors the first’s year trail commission along with the upfront fee. But, the entire initial commission paid in this case should not exceed the total expense ratio -- the amount that mutual funds charge investors to manage the money. The average expense ratio for most equity funds are in the range of 2.5-2.75% per year.

But, if an investor pulls his money out of the fund before the end of the mandated period, the mutual fund will ‘clawback’ the commissions.

Mutual funds will also seek the removal of a restriction on the payment of the trail fee. In the trail fee model, distributors are paid in a staggered manner till the time their clients remain invested in a scheme. Amfi had asked mutual funds to ensure that the second year’s trail fee does not exceed that of the first year.

“The blanket ban on upfront commissions was beginning to hurt both mutual funds and distributors,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital. “It is good that the industry is taking a step back because the misselling was happening in close-ended products,” he added.

Amfi had asked the mutual fund industry to cap upfront fee payment to distributors at 1% starting April 1. It also asked funds to move to a predominantly trail fee-based model. The decision to limit higher initial fees to distributors came after capital market regulator Sebi criticised funds for paying distributors higher commissions to sell close-ended schemes. The industry was aggressively pushing close-ended NFOs in 2014 by paying fees as high as 6-8% to distributors.

The regulator feared that this was leading to misselling. While Sebi initially planned to come out with rules to restrict upfront fee payment, later, it put the onus on the mutual fund industry to decide on the optimum pay structure.