* Asset churn by distributors to stop
* New product launches to slow
* Fund investing to turn cheap, transparent
The Indian market regulator's move to ban entry fees for investments into mutual funds will lead to a jump in long-term inflows as distributors adjust their business models to generate more volume and trail fees.
India's stock market regulator said on Thursday mutual funds can not levy any entry charges for investments but allowed distributors to claim a fee for their advise from investors. It also directed them to disclose commissions earned to clients.
"This will certainly help in bringing long-term quality assets to the mutual funds. It will help stop churning," said Chintamani Dagade, a senior research analyst with Morningstar.
More than half of the 1.2 trillion rupees equity assets of the funds industry was less than two years old at the end of March, data compiled by the Association of Mutual Funds in India show, as a result of frequent churning.
This is set to change as distributors, who get an upfront fee from about 2.5 percent entry load that equity funds charge, will now have no interest in making investors switch funds.
Instead, they stand to gain more in the form of trail fees or the money they get from fund houses on continuous basis, if investors kept the money invested longer.
While the changes will hurt distributors revenues in the short-term and limit fund firms ability to gather assets in new funds by paying large upfront commissions out of entry fee, it make investing cheaper and more transparent for investors.
A distributor "would be more interested to keep his trail alive," Abizer Diwanji, head of financial services at consultant KPMG said.
"What it will discourage is unnecessary NFOs (new fund offers) because what was happening is a guy who was earning 2.5 percent commission was interested in churning people from one scheme to the other just to make sure he makes his commission," he added.
FEE STRUCTURE
Some argue it will have no impact as many distributors used to pass bulk of the upfront fees to investors but were paying tax on the entire amount they used to receive from fund houses, effectively negating almost all the gains.
Many distributors were surviving on 30-100 basis points trail fee on the amount of investments they brought for funds.
Now, while they can charge a fee for their service, the onus is on them to add quality to investment advice and persuade investors to pay for it, a task many would find tough.
They may opt to sell products such as insurance which offers many times more commission than mutual funds.
"It is not sure how much they (investors) will be willing to pay," said Krishnan Sitaraman, head of fund services at CRISIL.
"If they are not willing to pay a reasonable level for the services distributors are rendering, then distributors may have second thoughts about continuing to sell mutual funds," he said.
But, in the long-term, mutual fund distribution is more attractive because funds are cheap and easier to sell than insurance and clients would continue to buy them, unlike insurance, which is a one-time investment.
"It is a game changer. The whole distribution is going to change," R S Srinivas Jain, chief marketing officer at SBI Mutual Fund, said.
India's stock market regulator said on Thursday mutual funds can not levy any entry charges for investments but allowed distributors to claim a fee for their advise from investors. It also directed them to disclose commissions earned to clients.
"This will certainly help in bringing long-term quality assets to the mutual funds. It will help stop churning," said Chintamani Dagade, a senior research analyst with Morningstar.
More than half of the 1.2 trillion rupees equity assets of the funds industry was less than two years old at the end of March, data compiled by the Association of Mutual Funds in India show, as a result of frequent churning.
This is set to change as distributors, who get an upfront fee from about 2.5 percent entry load that equity funds charge, will now have no interest in making investors switch funds.
Instead, they stand to gain more in the form of trail fees or the money they get from fund houses on continuous basis, if investors kept the money invested longer.
While the changes will hurt distributors revenues in the short-term and limit fund firms ability to gather assets in new funds by paying large upfront commissions out of entry fee, it make investing cheaper and more transparent for investors.
A distributor "would be more interested to keep his trail alive," Abizer Diwanji, head of financial services at consultant KPMG said.
"What it will discourage is unnecessary NFOs (new fund offers) because what was happening is a guy who was earning 2.5 percent commission was interested in churning people from one scheme to the other just to make sure he makes his commission," he added.
FEE STRUCTURE
Some argue it will have no impact as many distributors used to pass bulk of the upfront fees to investors but were paying tax on the entire amount they used to receive from fund houses, effectively negating almost all the gains.
Many distributors were surviving on 30-100 basis points trail fee on the amount of investments they brought for funds.
Now, while they can charge a fee for their service, the onus is on them to add quality to investment advice and persuade investors to pay for it, a task many would find tough.
They may opt to sell products such as insurance which offers many times more commission than mutual funds.
"It is not sure how much they (investors) will be willing to pay," said Krishnan Sitaraman, head of fund services at CRISIL.
"If they are not willing to pay a reasonable level for the services distributors are rendering, then distributors may have second thoughts about continuing to sell mutual funds," he said.
But, in the long-term, mutual fund distribution is more attractive because funds are cheap and easier to sell than insurance and clients would continue to buy them, unlike insurance, which is a one-time investment.
"It is a game changer. The whole distribution is going to change," R S Srinivas Jain, chief marketing officer at SBI Mutual Fund, said.
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