In a bid to shore up assets in a rising market, mutual funds resorted to doling out high upfront commissions to distributors in the past financial year, violating the best practices guidelines put out by industry body Association of Mutual Funds in India (Amfi).
Commissions paid for selling open-ended equity schemes went as high as 200 basis points (bps) while that for closed-ended ones stood at 5-6 per cent, said two people familiar with the matter.
"Virtually nobody is following the best practices guidelines and larger distributors with bargaining clout are pocketing higher commissions," said a senior industry official, on condition of anonymity.
The commission payout for distributors had dipped 22 per cent to Rs 36.6 billion in FY16 over the previous financial year after the cap came into effect. However, in FY17, total payout rose 36 per cent to Rs 49.87 billion. Total payouts in FY18 are likely to be even higher.
In January 2016, the mutual fund industry body had reportedly asked its members to cap their upfront commission payouts at 100 bps with immediate effect or face stringent checks by the capital market regulator. It is not clear if Amfi has resorted to similar warnings in the past few months or if it is taking up the matter with the regulator.
Illustration by Binay SinhaAn email sent to Amfi and the Securities and Exchange Board of India (Sebi) did not get a response.
"The current guidelines on upfront commission are akin to mandating wearing of helmets for two-wheeler riders. Some cities enforce it, some do not," said Dhirendra Kumar, chief executive, Value Research, a mutual fund tracker. "As long as both manufacturers and distributors benefit, the practice will continue."
Kumar, however, added that the regulator and Amfi had done their bit to make the sale of mutual funds schemes more transparent in the past few years. This was by way of mandating periodic commission disclosures and creating awareness about direct plans, which bypasses distributors.
From October 2016, mutual fund houses have to disclose the amount of commission paid to distributors in absolute terms in the common account statement (CAS) that goes out to investors every six months. Direct plans were introduced in 2013 and now form nearly 40 per cent of sectoral assets.
High upfront commissions have been particularly instrumental in driving up sales of close-ended schemes. "These schemes get pushed to investors because of the money received upfront. They compromise on liquidity but are sold on the premise that investors do not have to worry about the churn," said Kumar.
After two consecutive years of lull, the launch of closed-end funds has gained traction in the past financial year. In FY18, such schemes collectively mopped up Rs 503 billion, an 80 per cent increase over the previous financial year, the Value Research data show.
MFs have garnered record assets in last one year on back of monthly SIPs to the tune of 50-60 billion. Total industry assets stood at over Rs 22 trillion as of February, of which equity assets totalled about Rs 7 trillion.
The MF industry has seen an overall addition of 3.2 million new investors over the last one year, as per Amfi. The total number of folios grew by 10.5 million, or 26 per cent, while the SIP accounts grew by 7 million, or 52 per cent, during the period. Monthly SIP contribution for the industry touched Rs 64.25 billion from 20.5 million SIP accounts.