SEBI’s latest ruling on mutual funds - its impact and after-effects

SEBI’s recent announcement on mutual funds has two important bearings:
1. There would be no entry load on any mutual fund investment
2. Distributors would have to negotiate their commission with their investors

No arguments about the first point, it is of immense benefit to the investor. This will probably lead to a higher exit load which is good for investors since they would be incentivized to hold their investments long-term. A couple of years back when there was no entry load for SIPs, but was later withdrawn.

As far as the second point is concerned, I think it is a good move, but ahead of its time. The Indian investor is still not well informed in matters relating to investments and mutual funds. Besides, the penetration of mutual funds is rather low. Insofar as investor education is concerned, we have a long way to go before we can bring ourselves at par with the developed markets (whose systems and methods we are keen to emulate).

Though in the long-term the move will prove to be good for the financial planning industry and for the investor, it will have several short-term impacts that may be deterrent to the interests of the small investors, distributors as well as the mutual fund industry.
1. INVESTORS MAY END UP PAYING A HIGHER COMMISSION: On the commission issue, I foresee a lot of unnecessary bargaining happening between the distributor and the investor. In fact, distributors maybe charging a higher rate now -- say Rs 500 on Rs 5000 investment. Even if the investor bargains and brings it down by 50%, he would still be paying a much higher fee / load than was applicable earlier. Since a fair percentage of investors today are not even aware of the kind of commission the distributors get or that there is anything called an entry load, they might feel happy about the bargain. However, they could be paying a much higher percentage as commission.
2. COMMISSIONS MAY BE PAID IN CASH: Distributors may also charge commission in cash, leading to loss of both service tax (that the distributor would now be liable to pay) and as well as income tax to the government. Small amounts of commission – perhaps in the region of Rs 1000 or more may be passed on in cash to the distributor.
3. SIPs MAY SUFFER: SIPs or systematic investment plans may suffer since the investor may not be open to paying commission each month, or paying a lump sum at the beginning of the SIP term. So the distributor would probably stay away from recommending SIPs as lump sum investments are good and less hassle for him/her.
4. DISTRIBUTORS WILL FOCUS ON ULIPs: Distributors may start focusing more on ULIPs where there is low transparency regarding the commission going out to the agent. Since commissions are much higher in ULIPs, the obvious tendency for ‘sellers’ of both would be to maximize their revenue by proposing ULIPs and presenting them as mutual funds. Again, the small retail investor will lose out. As it is there is enough talk of ‘mis-selling’ of ULIPs.
5. EXPENSES TO INCREASE AFFECTING NAVs OF MUTUAL FUNDS: To get into more nitty-gritty of things, the charges are going to go up. One reason for this would be that mutual fund houses would probably work on higher trails and various marketing schemes to keep distributors happy (incidentally 90% of all business of mutual funds comes from distributors). Where would money for all this come from? From charges, which result in reduction of the NAV. Again who will suffer more? The small retail investor.

There is immense amount that SEBI and mutual fund houses can and need to do to increase investor awareness and grow the market. Ad hoc measures like this and an uneven playing field among various financial products would only lead to more confusion initially and consequent mis-selling by distributors. Unless tackled at a much broader level, the small and uninformed investor will continue to pay the price and will remain a small participant.

Luring distributors to overcome the market downturn

From giving a kilo of gold to ensuring trips abroad for distributors, mutual funds are adopting new tricks to increase AUMs

In the last month or two, there have been a few mutual funds that have launched insurance-linked products. The reason – the markets are down and so are the investments into equity mutual funds. So how does one entice the investor? Spice it up with insurance. Suddenly there is a huge surge of applications into equity funds.

Now you may ask the reason why? What has the linking of insurance got to do with sudden upsurge in the number of applications? Well, the distributors are being lured with ‘exciting guaranteed gifts’ ranging from movie tickets to a kilo of gold, bikes and even a trip abroad. All that he has to do is to bring in as many applications as he can. And what are the distributors doing to win the race – if you want to invest Rs 5,000 in a mutual fund, he will convince you to sign 5 forms. Then he will fill in the forms for you and submit 5 applications. The terms and conditions in fine print are not even mentioned, forget being evaluated and compared.

Being a distributor myself, I am appalled to see fellow distributors and sales managers of mutual funds running against time to ‘log in’ applications. I am not against marketing, but this is pure self-gratification. The investor’s interest is the last thing on the distributor’s and sales manager’s mind. Both are simply trying to achieve targets at the expense of the poor investor. Knee-jerk reactions like this to increase AUMs (assets under management) will increase mis-selling and kill investor interest.

Are we here to advise on mutual fund investments or is it just another ‘grand sale at a shopping mall’? I wish that the authorities realize what is going on and put an end to this ‘gift mania’ before it gets out of hand.