Change in commission structure, market volatility weigh on equity NFOs

The scrapping of upfront commission already seems to be making a dent on the collection momentum of equity new fund offers (NFOs). In November, newly launched open-ended equity schemes saw collection of Rs 11.72 billion, which was 55 per cent lower than previous month. 

According to industry sources, upfront commissions to distributors were one of the reasons that led to higher collections during the NFOs. 

Experts say collections are expected to remain lower in the near-term as large distributors such as banks will have to relook at their business models, following the Securities and Exchange Board of India’s (Sebi’s) decision to scrap upfront commissions. 

While several independent financial advisors (IFAs) had shifted to the trail model in recent years, bank-backed distributors were still being compensated through upfront commissions for selling mutual fund (MF) products.

Sebi, in a circular dated October 22, introduced a slew of changes aimed at bringing transparency in expenses, reducing portfolio churning and mis-selling. One of the changes was scrapping of upfront commission and following full trail model for all schemes. Experts add going ahead market volatility will be another factor weighing on collections through equity NFOs.