MFs call report on mis-selling impractical

Say study has not considered that product penetration is low

A report on mis-selling of financial products has not gone down well with fund houses and distributors, which said the recommendations had not considered that mutual funds (MFs) were still products that needed to be pushed to investors.

The Securities and Exchange Board of India (Sebi) put up the recommendations of a committee headed by Sumit Bose for public comments on its website early this week. The last date to give suggestions is October 12.

The committee’s report was given to the finance ministry in August. The proposals include making the total expense ratio not fungible, removal of upfront commissions, no extra commissions for sales in small towns, reduction in the trail commission to zero and reduction in the expense ratio.

"We reviewed the recommendations much before Sebi sought comments. We are seeking our members' views," said H N Sinor, chief executive officer at the Association of Mutual Funds in India (Amfi).

“Commercial realities of the MF business have not been taken into consideration. We had given our viewpoint to the committee but the final report does not reflect it. If the recommendations are accepted in their current form, I would not be surprised to see several MF distributors and advisors exiting the business,”said Rajiv Bajaj, vice-chairman and managing director of Bajaj Capital.

"Several of the recommendations are not practical. Had we been a mature industry, it could have been understood. In their current form, the recommendations will have a negative impact on the sector,” said the chief executive officer of a mid-sized fund house, who did not wish to be named.

Many MF distributors are switching to a trail-based model and the report suggests reducing trail commissions as well. “If trail goes away or is reduced, what incentives will there be for distributors? Professional time has to be priced in,” Bajaj said.

“In the short term, it could be painful for the sector. Many distributors might not sell MFs. However, in that case, sales personnel of fund houses would themselves have to reach out to their clients,” said Dhirendra Kumar, chief executive officer of fund tracking firm Value Research.

The sector is also against the committee's suggestion of a reduction in the expense ratio, which it said should not be linked to assets under management. "In the absence of the incentives we have, it will difficult to grow when client acquisition costs are high," said a source.

The size of the MF sector is Rs 13 lakh crore, of which retail investments in equity schemes are less than Rs 4 lakh crore. The MF investor base is 10 million, less than one per cent of India’s population.