Sebi pulls up mutual funds over high commissions

Close-ended schemes dolling out commission up to 6%

The high incentives paid by mutual funds (MFs) to push sales of close-ended schemes haven’t gone down well with the Securities and Exchange Board of India (Sebi). The regulator has told fund houses to avoid paying irrational commissions to distributors.

Several new schemes have been paying commissions of as much as six per cent. Sebi is concerned this might lead to misselling and compromise investor interest, say people in the know.

At the recent annual general meeting of the Association of Mutual Funds in India (Amfi), Sebi Chairman U K Sinha expressed discomfort with such high commissions. He said Sebi can’t always keep intervening in this segment, adding fund houses should restrain themselves from tempting distributors to push products.

With India’s key stock indices gaining 60 per cent so far this year, the MF sector has launched the largest number of new fund offers (NFOs) in the equity segment since 2008.

“The markets have improved and people are willing to put in fresh money. As the majority of these funds are close-ended, with much better commissions, distributors are pushing these products to investors. I believe this will continue, as new launches are an easy way to get money in a rising market in India. There will be more such funds coming in, with lock-in periods,” said Niranjan Risbood, director (fund research), Morningstar India.

So far this year, 40 equity NFOs have hit the market, garnering fresh assets worth Rs 4,800 crore. Of these, 24, or about 70 per cent, are close-ended products, with lock-in periods of three-five years. Many of these new schemes were aggressively pushed through higher up-front commissions.

Many said more NFOs were likely in the coming months.

Though Amfi has conveyed Sebi’s discomfort with high commissions to all fund houses, those in the sector aren’t happy at the diktat. “At the end of the day, we have to sell our products. If we are willing to pay the distributors by taking a knock on profitability, Sebi shouldn’t have an issue with it,” said a senior official at a large fund house.

Some believe a robust commission structure is necessary to draw investors to MFs. “Equity MFs are still push-products. Investors rarely come on their own and invest,” said a senior official at another fund house. Currently, the Rs 10-lakh-crore mutual fund sector offers about 380 equity schemes. Of the total assets under management, about a quarter, or Rs 2.61 lakh crore, are in equity schemes.