'Closed-ended schemes open to mis-selling'

Unease at much fatter upfront commissions, with insiders concerned at possible incentive for mis-selling

Mutual funds are back to offering steep commissions to distributors to push their products. Some fund houses that recently launched closed-ended equity schemes are offering as high as eight per cent in upfront commission. Given that this is four times the usual commission that distributors get, experts warn it could lead to mis-selling.

Distributors usually get one or two per cent commission for selling open-ended equity schemes, which do not have a lock-in period, depending on the fund house. In the case of closed-ended schemes, these have a lock-in period of three to five years. The reason why mutual funds pay such high commission to distributors is to get money that can be locked in for this tenure. The move comes at a time when investors have been pulling money out of stocks and equity schemes. Since January this year, Rs 10,694 crore had moved out of equity products as outflows.

Reliance Mutual Fund, ICICI Prudential MF, Axis MF and Union KBC have launched such closed-ended products in the recent past.

Distributors are pushing closed-ended schemes on the ground that investors would derive much higher returns from equities after three or five years. Critics, however, say the idea is to get a stable corpus.

In 2006, there was a flurry of closed-ended launches after the Securities and Exchange Board of India banned open-ended mutual fund schemes from amortising their initial issue expenses. However, investors took a severe beating after the market crash in 2008, resulting in many long-term investors making negligible returns or losing their capital.

Mutual fund industry watchers are wary of product-pushing strategies.

“Higher commissions are tempting. And, one cannot rule out mis-selling. Investors should also understand the risks in such offerings,” said Dhirendra Kumar, CEO of Delhi-based Value Research.

Industry sources say distributors are advising existing customers to switch to close-ended products. “I have no dispute with such a value product, but one should see its consequences in case the markets do not do well during this period,” said the executive vice-president of a large-sized fund house.

His views are echoed by the CEO of a mid-sized fund house. “Looking at the buoyancy in the market, it will be a win-win situation for all — distributors, investors and AMCs (asset management companies). But if the situation turns out ugly, investors would be impacted and distributors may turn out to be the only beneficiary.”

As on October 31, there are 324 open-ended equity schemes against 20 closed-ended equity schemes.