The long tug-of-war over the commission structure in selling mutual fund products seems coming to an end. After nearly three months of deliberations on the issue, the Association of Mutual Funds of India (Amfi) has sent a proposal to all fund houses to cap the upfront commission at 100 basis points (bps). It has asked the sector not to upfront the trail commission, as was the case in many of the recent close-end equity-related schemes.
In a meeting on Monday, the body took the decision to sent this proposal. The measures are likely to be implemented from April 1 and will be applicable for all schemes.
According to Amfi, the trail commission in the first year will be based on the balance of the total expense ratio (TER), after deducting the upfront commission and the operating expenses. This means, there is no cap on trail commissions and asset management companies (AMCs) will be free to decide how much commission these want to pay by way of trail.
But Amfi asked fund houses not to fluctuate the percentage of the trail commission. If in the first year, the trail component stands at 50 bps, it has to remain the same across all years.
"For a fund house which wants to survive for the long term, this is a good move, because paying a high upfront of five-six per cent (for closed funds) only hurts the fund house's balance sheet in the long term. I believe keeping investors for the long term should be rewarded and not just getting the investor," said the chief executive of a fund house.
The step came at a time when the capital markets regulator Securities and Exchange Board of India (Sebi) had showed strong reservations against the high commission payouts to distributors. The watchdog had also flagged concerns on the alleged misselling of products.
Companies feel it's a sensitive development as the distributor community will be at the fore as far as the impact of such a move is concerned. These said a majority of the fund houses will prefer to keep upfront at 50 bps and raise the trail commission to 100 bps or more to please distributors.
According to a distributor, "These moves are looking to target closed-end funds and equity-linked savings schemes, which pay a higher upfront compared to open end funds (50 bps-1.5 per cent)."
Amfi feels this was a much required step in the best interest of the sector and the distribution community.
Sector executives told Business Standard there was immense pressure from Sebi to come up with a solution in a voluntary way.
Though, Sebi was supposed to come out with a circular on the same in January, but the regulator preferred to put the ball in the sector's court to avoid criticism.
These guidelines, however, are subject to continuous monitoring. Amfi has said that it will monitor the situation for the first six months and may review the guidelines, in case it feels it is necessary.