SEBI ruling on entry load may hit MF distribution

MUMBAI: One man���s meat is another man���s poison, goes the phrase. The SEBI ruling on Thursday giving mutual fund investors the freedom to negotiate fees with distributors seems to exemplify this adage.

The MF industry, which also includes 70,000-strong distribution personnel, is unhappy over the SEBI move to do away with entry load on fund schemes. The new regulations will hurt MF distributors badly, and to some extent, the industry too, say industry officials.

���The move will kill retail distribution,��� said Akhilesh Singh, wealth management head, Emkay Global Financial Services. ���The business model was not lucrative even after receiving 2.25% as fees. Now, investors may pay just about 0.5-1% as fee for selling a scheme. If an investor makes an investment worth Rs 50,000, we���ll get Rs 250-500 as our commission. Which distributor will service clients for fees as low as that. They���ll probably shift to selling only ULIPs or focus on stock broking,��� Mr Singh added.

There are worries of cheques (given by investors) bouncing (that increase the cost of recovery) or not being remunerated at all by investors. Investors will have to write cheques of very small amounts and the taxation angle, too, is not very clear. If the fee (commission) component is treated as brokerage, the distributor will have to collect service tax from the investor as well.

Fund houses fear distributors will resort to selling ULIPs and insurance schemes over MF schemes. By selling a ULIP, MFs pocket anywhere between 20% and 50% as commission, not to mention the 5-8% trail on investment every year. Insurers, on their part, will launch ���low-expense��� ULIPs which will further work against MFs. Distributors also have the option to offer to distribute FD schemes that yield 1.7-2.5%, and RBI Tax Relief Bonds, which give 1% as commission charges.

���This is a path-breaking ruling, the effects of which will only be known in the long-term,��� said Vijai Mantri, CEO, DLF Pramerica, which will soon set up a new AMC. ���It���ll be a bit tough for everyone, as they will have to come out with newer strategies, technologies and sales-pitch to sell funds,��� Mr Mantri added.

Ifast Financial MD Rajesh Krishnamoorthy said: ���Lots of things are hazy, as of now. The move will be beneficial over the long term, as advice, in real terms, would be valued by the investor.���

The SEBI mandate to disclose commission, trail or other benefits received by the distributor/advisor will not work well as intermediaries would ask for ���extra toppings��� to recommend schemes. These include small cash incentives, event sponsorships, advertisements in in-house magazines (of the distributor), expensive gifts and sponsored tours.

���Distributors will find ways to get around the rule; they will ask for hidden incentives to recommend a particular fund house. The distributor may show 1.5% as commission received from the AMC without revealing the sponsorships or advertisement money received in excess to the commission,��� said the marketing head of a bank-promoted fund house.