Fund houses make 50-basis point upfront payment to distributors

Sebi ban on entry load triggers the decision.

In a bid to compensate the distributors following market regulator Securities and Exchange Board of India’s (Sebi’s) ban on entry load, some mutual funds have decided to make at least 50 basis points (bps) upfront payment to them. A few others are going up to even 100 bps.

Sebi had banned entry load from August 1 and made it clear that distributors would have to negotiate the commission with customers and be paid through a separate cheque.

Admitting that it would put a burden on asset management companies (AMCs), fund houses said they had no option but to resort to such a move in order to attract investments through the distribution network.

Not everyone however can go beyond 50 bps. The chief executive officer (CEO) of a foreign mutual fund house having operations in India said only those with high profitability can manage to pay more than 50 bps.

Mutual fund scheme distributors said that the upfront payment structure was already in place. “Though the amount of upfront payment depends on how deep the AMCs’ pockets are, the average is 50 bps,” said a distributor.

“Especially if the exit load period is reduced to only the first year of investment, there is not much scope and there will be pressure on pricing,” said Akhilesh Singh, business head (wealth management) of Emkay Financial Services.

“Since 90 per cent of our business comes through the distributor network, we have to compensate them from our own pocket to the extent possible,” said the chief marketing officer (CMO) of one of the leading domestic fund houses seeking anonymity.

AP Kurian, chairman of the Association of Mutual Funds in India (Amfi), said: “There is no uniform call on how the distributors will be compensated. Since business models of different fund houses vary from each other, we have left it to them to take individual calls on how to approach the issue.”

Unless distributors were incentivised in such a situation, one could end up losing ground in a competitive scenario, added the CMO.

The CEO of another fund house said, “We have informed our distributors that we will pay a reasonable brokerage of 1 per cent. Though it will be a burden, but distributors have to be taken care of since they are our business partners.”