With a major source of income in the form of entry loads on mutual fund (MF) schemes having died down, distributors are pushing PMS (portfolio management services) products.
For, distributors can charge as much as 2.25-2.50 per cent commission in PMS schemes, whereas all loads on MF investments have been banned, and service charges are based on the investor’s discretion. Market players said some MFs had been paying higher commissions to distributors to market their PMS schemes.
“We are not focusing on mutual funds as they are no more a remunerative asset class. Moreover, there is not much investor appetite for equities at this point in time. Having said that, high net worth individuals are interested in equity PMS and structured products. A PMS is more transparent and a better way to invest in equities than mutual funds. In PMS, the client has a better control on his portfolio,” said a distributor who did not wish to be named.
The Securities and Exchange Board of India (Sebi) had banned entry load on MFs from August 2009. Since then, distributors have been protesting at the lost commissions. Although fund houses are compensating by paying upfront commissions, the amount is much lower than the 2.25 per cent load they used to get. Hence, most distributors have found it logical to concentrate on PMS, which have bigger clients and ticket sizes.
Structured products also offer high commissions. Experts said the client ends up paying as much as 5-6 per cent of the investment amount as charges in various equity-linked debentures. But investors do not get to know this as these are not explicitly stated. As a result, distributors are selling structured products aggressively.
Some products in the market include ICICI Prudential’s Target Return Fund, HSBC MF’s Large Cap Oriented Portfolio, ING’s Quant Fund and Birla Sun Life’s Encash fund. Distributors said these schemes were charging 2.25-2.5 per cent upfront. There is also a 1-1.5 per cent management fee charged on daily or quarterly basis.
“PMS has picked up in the last few months. And, distributors are demanding better compensation from manufacturers, that is, fund houses. The upfront commission charged is generally decided by distributors and not fund houses. In many cases, it also depends on volumes. For a larger set of clients, the distributor may not charge anything, but for a smaller sum, such as Rs 5 lakh or Rs 10 lakh, he may charge an entry load,” said Deepak Sharma, chief executive, Sarthi Wealth Management Consultants.
Sebi had, in 2008, told PMS providers not to pool assets of investors the way MFs do. This led to a rise in operational costs for many. Under the current norm, PMS providers need to have a separate demat account and a separate portfolio for each investor. As a result, margins have shrunk. But this has been more or less compensated by rise in volumes.
“We have added close to 100 customers in the last few months. The level of difficulty has certainly gone up as we have to do separate KYC (know-your-customer) exercise for each investor. But, the business is growing much faster,” said Sriram Venkatasubramaniam, head, wealth management, FCH Centrum Wealth Managers.
MFs, on their part, have increased focus on the PMS business. A number of asset management companies have applied for PMS licences with Sebi. These include Axis MF, Shinsei AMC and Canara Robeco MF.