Monday, June 14, 2010

Mutual funds hit a hurdle on regulatory changes

The past one year has been trying times for the mutual fund industry. Mutual funds, on the path of recovery from the ills of economicdownturn, were hit by a barrage of regulatory changes, a good number of them limiting the operational scope of mutual funds.

Just when the industry was coming to terms with the clampdown on fixed maturity plans (FMPs) and inter-scheme transfers , the Securities and Exchange Board Of India (Sebi) dealt another blow in the form of entry-load ban.

Despite serious protests from mutual fund distributors — numbering over 70,000, the regulator imposed the ban from August 1. Sebi further asked fund houses to disclose all commission, trail or other benefits received by them (from asset management companies) for advising a particular scheme to an investor.

Almost a year into the entry load ban, mutual fund distributors are still unsure as to how they go about doing their business. According to independent financial advisors (IFAs), generous investors pay 0.5-1 % as fee for selling a mutual fund scheme. If the investor makes an investment worth Rs 50,000, the distributor gets just around Rs 250 (at 0.5%) as their commission.

“It is not worth our effort to sell funds at such low commission payouts,” said a Mumbai-based distributor. There are also worries of cheques (given by investors) getting bounced (that increases the cost of recovery) or not being remunerated at all by investors. The Sebi mandate to disclose commission, trail or other benefits received by the distributor/advisor is also not in the right spirit.

Large-size distributors are still offering “extra toppings” to recommend schemes. These include small cash incentives, event sponsorships, advertisements in in-house magazines (of the distributor), expensive gifts and sponsored tours.

Lack of proper incentives for distributing equity mutual funds are prompting distributors to hard-sell insurance policies, company deposits and portfolio management schemes.

After distributors, Sebi has now trained its guns on fund houses; the first step was to discourage fund houses from raising exit load on mutual funds. It dealt another blow to fund houses asking them to pay upfront commission to distributors from their own profits and not from the expense pool.

In a ‘confidential’ email communique, the regulator directed fund houses not to charge upfront commissions to the overall 2.5% expense charges, which until recently was split in equal proportions to meet asset management charges and expenses (including upfront commission, transfer agent charges and marketing expenses).

Just a week ago, at the board meet on mutual funds, the regulator told asset management companies (AMCs) not to indulge in ‘dynamic pricing’ while managing debt funds. Fund houses, in their bid to attract more investments, do not levy asset management charges on institutional investors when portfolio yields come off sharply.

Likewise, when yields go up significantly , fund houses charge a higher expense ratio on institutional portfolios, making good the loss (of fund management charges) they have suffered when yields go down. The market regulator has told fund houses to stop this practice and limit changes in fees to 5 basis points on a daily basis (or 0.05%), or 0.5% in a year.

According to sources, this is not a good move for the industry. “The competitive edge of debt funds, which are striving hard to get institutional money, can only be maintained if pricing strategies are left to the fund house,” said the marketing head of a bank-promoted fund house.

“We maintain our competitive edge by discounting expense charges to institutional investors. If dynamic prices are taken away, there will be nothing to differentiate among fund houses, at least for the bulk investor,” the marketing head said.

The regulator also quashed the mutual fund industry’s demand to allow flexibility in the use of the expense ratio of 2.25%, which mutual funds deduct annually from investors’ net assets value (NAV). Mutual funds made a proposal to Sebi to do away with all cost bifurcations within the expense ratio charged on equity funds.

The regulator agreed to remove all cost bifurcations, but wanted mutual funds to reduce the expense ratio to 1.5% (from 2.25%). This was not acceptable to AMFI and members of participating mutual funds. The Sebi mutual fund panel decided to maintain status quo on expense ratio at 2.25%.

Source: http://economictimes.indiatimes.com/Features/Financial-Times/Mutual-funds-hit-a-hurdle-on-regulatory-changes/articleshow/6042494.cms?curpg=1

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