MFs, distributors at wits end over commission disclosures

Industry confused as ban on entry load takes effect from today.

The Rs 670,000-crore (average assets under management) mutual fund industry faces some big challenges from August 1.

According to the Securities and Exchange Board of India’s (Sebi’s) guidelines, fund houses cannot charge any entry load for both equity and debt investments from this date onwards. Also, distributors are supposed to negotiate their commission with customers. More importantly, they have to declare the commissions they are getting from fund houses for different schemes.

Fund houses were earlier charging 2.25 per cent on equity schemes and nothing for debt schemes (there is an exit load on debt schemes). Earlier, this amount would largely go to distributors.

Under the new regime, fund houses have been allowed to use 1 per cent of the exit load to meet their distribution and marketing costs. According to an industry expert, only a couple of fund houses have declared their new upfront fees for equity schemes. One mid-size fund house has declared 1.25 per cent sales/upfront commission.

Industry sources said big fund houses were expected to offer up to 0.5 per cent commission for lumpsum investments and 1 per cent for systematic investment plans.

There are indications that there could be a rise in the yearly trail commission from 0.50-0.75 per cent at present to 1-1.25 per cent.

However, there is confusion over declaring commissions that they are paid for similar products. “We said that distributors need to declare the commissions that they are charging for similar products. No one has approached us for further clarity,” said a senior Sebi official close to the development.

Distributors, on their part, question the definition of similar products. “The question is that besides sectoral schemes, it is quite difficult to classify and say that this scheme follows a particular theme,” said a distributor.

For instance, what could be a similar scheme for HDFC-200? Even a thematic fund such as Reliance Power Diversified could qualify because of its wide mandate. To tell the customer a whole lot of schemes and their respective commissions would confuse them further, said distributors.

Fund managers, on their part, are non-committal. Said AP Kurian, chairman, Association of Mutual Funds in India, “Fund houses are still working on this. There should be more clarity in the next few days.”

Till then, a distributor said, “The only thing certain is the ban on entry load, the rest we will figure out as we go along.”