Tickets to T20: Fund houses are game for freebies

MUMBAI: When Euripides, the renowned Greek playwright of yore, said, ‘gifts persuade even the gods,’ he would not have thought the saying would hold good millenniums later.

For nothing much has changed in the world of finance and investment, wherein brokers, investment advisors and relationship managers, the lords of this world, are heaped with freebies, expensive gifts and hard cash by fund houses for every target (slab) achieved in product distribution.

According to sources, in the distribution industry, ‘freebie of the season’ was a six-night-all-expenses-paid stay in a plush South African resort, tickets for two for either the semi-final or final (both in the case of high-performers) of the Twenty20 World Cup.

“Banks and top mutual fund distributors (having a nation-wide presence) are the major recipients of such gifts and freebies. Down the distribution line, even smaller banks and financial co-operatives get freebies (both kind and cash incentives) in smaller proportions,” says the product distribution head of a leading private bank.

Distributors (which also include top brokerages) are given a target in the range of Rs 50 crore to Rs 1,500 crore every year. On surpassing the given target, distributors (branch heads and relationship managers in particular) are rewarded in order of their performance.

They are taken on junket tours, offered cash incentives and expensive gifts (like high-end watches, electronic gadgets, gift vouchers, home appliances and, at times, even gems and jewellery). Event sponsorship (an event convened by distributors), sales support (cost-sharing while promoting a product) and arranging parties are some of the other incentives offered to distributors.

Fund houses make a killing during fund launches. These days, fund houses pay anything between 3% and 5% of the amount mobilised through NFOs as up-front commission to agents. In addition, there is also a trail commission ranging from 0.5% to 1.5% per annum plus freebies.

Where do these fund houses get the money to finance these promotional activities? “Indian fund houses are cash-strapped, but they set aside a huge budget for promotional activities. Many such activities are also funded by entry loads and initial issue expenses that are charged to retail investors to enter a fund,” says a Mumbai-based distributor.

Fund houses are now launching schemes with a lock-in period to adjust cost amortisation at the end of the term (lock-in period). So, if investors pull out the money before the lock-in period, fund houses will make good the expenses incurred by charging an exit load.

Considering this in the light of capital market regulator SEBI’s move to impose variable entry load on funds, a section of the investor community feels that such a move would dissuade distributors from pushing bad investment products.

Fund houses contend that insurance companies pay an even higher entry load at the time of taking a policy. “They even give commissions to agents. This move is seen as a means to cut short the growing popularity of mutual funds. In these days of incentive-based selling, you (and the agent, who’s bringing the business) get freebies on everything you buy. One thing is sure, no fund house is misappropriating investors’ money,” said the CIO of a mutual fund house.