Mutual funds should decide on incentives for distributors

Abolition of entry load on mutual fund schemes was one of the best decisions by the regulator in favour of investors, says Kavasseri Narayanan Vaidyanathan , an executive director at Sebi in charge of mutual funds whose term ended on Thursday. Mutual funds should decide on incentives for distributors , in stead of middlemen dictating terms to the industry. "Entry load ban is one of the best decisions taken from an investors' point of view. Although some parts of the industry has adapted to it and adopted new strategy, a number of them even today have not adapted to the change," said Vaidyanathan in an interview with ET.

His two-year stint at the capital market regulators office ended on June 30. "Asset management companies have given away their pricing power to distributors. If they want their business plan to succeed, they will have to get it back. For large institutional investments, fund houses have given the pricing power to corporates and banks while for retail investors they have given it to the distributors." Indian fund houses, which manage equity and debt schemes with a corpus of over . 7 lakh crore, have been pinning hopes on a reversal of policy on entry loads taken by CB Bhave.

But new chief UK Sinha has ruled out rolling back his predecessor's decision but is open to incentive schemes. Entry load refers to the industry practice of passing on 2.25% of the money paid by investors to buy mutual fund units as commission to distributors. Asset management companies, which run mutual funds, have incessantly complained that distributors are no longer keen to sell mutual funds to investors. "Sebi has taken note of the fact that number of folios and assets under management has declined. So, Sebi is looking at some way to incentivise distributors in a manner it is not very costly for investors," Sinha recently said at an industry conference .

"We feel especially for those retail investors who may be first-time investors who have not entered the market at all, unless some incentive is given it will be difficult to increase the penetration of the industry." The mutual fund industry's assets under management fell 4% in fiscal 2011, compared with a gain of 47% a year earlier as distributors who could not be paid by mutual funds stopped selling mutual fund schemes. A distributor could earn a commission of three to 4% on new schemes and two to 2.5% on existing schemes prior to the ban on entry loads. It has fallen to 0.75-1 %, a recent PriceWaterhouse report said.

Sale of mutual fund products in small towns has gone down over the past two years and concentration has happened in bigger towns, it said. Along with potential incentives, the regulator has also hinted at some regulation for distributors. "The big issue before Sebi is to address mis-buying and mis-selling . Mis-buying can be dealt with through investor education and mis-selling through distributor regulation ," he said. Mr Vaidyanathan termed his stint at Sebi as very interesting. "A lot of us in life want to do public good but the probability of success is when one is in the system."

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/mutual-funds-should-decide-on-incentives-for-distributors/articleshow/9059271.cms