MF distributors continue to be a worried lot

Imposition of service tax, capping of upfront commission and shift to direct plans add to woes

Ankit Patel, 22, who wants to be a mutual fund distributor in Lucknow, is a bit worried. After obtaining the mandatory National Institute of Securities Markets (NISM) certificate last month, he is uncertain if he will be able to earn a living being a seller of mutual fund offerings. The reasons for his apprehensions are many. These include, the recent capping of upfront commission, a shift towards direct investments and the latest salvo being bringing distributors under the service tax net. 

“I think it will be tough to make for a living if I restrict myself only to MFs. There have to be other sources for income, too,” he says.

Many others share similar concerns. If the problems being faced by distributors are not answered, the MF sector might not be able to attract enough people into this work.

Hemant Rustagi, chief executive officer (CEO) of Wiseinvest Advisors, says: "Withdrawal of service tax exemption will prove negative for MF distributors. They work at a miniscule margin and if they straightaway get 14 per cent less, how would they expand the business?" 

Sector executives says they're trying for a way to reduce the impact on their distributors. Sundeep Sikka, CEO, Reliance MF and chairman of the Association of Mutual Funds in India (Amfi), says: “There is an impact on cash flows in distributors’ hand. Service tax is an issue. The value of distributors is enormous and our requirement for distributors will only rise.”

After the Lehman crisis in late 2008, which triggered a global one, the number of distributors registered with Amfi had significantly gone down to a mere 40,000, from nearly 100,000 earlier. However, over recent years, the numbers have again grown, to about 90,000. A free registration drive by Amfi played an important role. However, how many are active is a question.

Dhirendra Kumar, CEO of fund tracking firm Value Research, says, “Taxing distributors with service tax is unfair. The regulator’s advice to Amfi to not pass it on to investors is wrong in principle. Going forward, I do not think the sector will have more distributors. Rather, there will be a need for advisors who can hand-hold investors. Distributors' business model is changing and they can’t survive by being only distributors.”

Agrees V Ramesh, managing director of the Institution of Mutual Funds Intermediaries. “I believe distributors who add value to their investors by advising them need not be worried. An advisory model is the need of the hour.”

The sector currently has Rs 12 lakh crore of assets under management. The number of investor folios are in excess of 40 million. The equity segment has over the past 18 months seen a robust increase in assets and in investor accounts.