Finance ministry, Sebi looking to make mutual funds attractive for distributors

The finance ministry and capital market watchdog Sebi will think of ways to revive the fortunes of the mutual fund industry by making the incentive structure more attractive for distributors. The ministry will meet industry representatives and Sebi officials on Monday before drawing up a plan to give a leg up to the industry that is faced with steady outflows, partly due to disinterested distributors.

Commissions to distributors and marketing expenses were met by the fund house by charging an entry load of 2.25% from investors. Of every Rs 100 an investor put in, Rs 2.25 was charged as entry load while Rs 97.75 went into stock purchases. Of this, the chunk was earmarked for distributor commission.

The entry load was banned in 2009 by former Sebi chief CB Bhave, who felt that investors were being taken for a ride by distributors who encouraged investors to churn their portfolios. The ban, however, dried up inflows into mutual funds.

"The objective is to reinvigorate the mutual fund sector," a finance ministry official told ET, confirming that the issue to bring back incentives was on the agenda and would be taken up with the market regulator. In the absence of sales push, coupled with a dismal market, equity schemes assets fell 11% in a year to Rs 1.67 lakh crore in May.

The meeting comes close on the heels of Prime Minister Manmohan Singh's statement on Wednesday that there were problems facing the mutual fund industry that needed to be resolved.

current Sebi Chairman UK Sinha may find it difficult to lift the ban as it may be perceived as anti-investor. "The UK had proposed a similar ban ahead of India, but later deferred it for three years, and that too after giving the domestic industry 18 months to adjust. There may be a need to follow this example in the wake of global developments," said a government official.

While several fund houses rampantly misused the entry load mechanism to shower distributors with gifts and foreign junkets, the ban stunned funds as well as intermediaries, which had no time to restructure themselves.

Brokers felt it could have been done in a phased manner as it made little sense for them to sell MFs in smaller cities for collecting investments worth a few lakhs. Industry body AMFI and mutual fund houses have made several representations to Sebi in the last one year advocating review of the cost structure, so as to have a wider retail participation and geographical penetration. Experts suggest a comprehensive package of measures to revive the industry.

"Like any other industry, mutual fund industry is also under pressure due to weak economic environment. Measures like reversing entry load ban will not alone revive the industry. There is a need for having greater flexibility in managing the expense ratio. Mutual funds should also be allowed to launch pension funds to attract long-term investors," said Dhirendra Kumar, CEO, Value Research.

Sebi had earlier informally sounded out market participants on reversing the ban on entry load, but never went ahead to revoke it. It has also met various market participants like fund houses, investors associations, distributors and mutual fund advisors in the last few months to seek their views on the subject, sources said.

"As part of the discussion, Sebi had sought views of industry participants as to whether reversing the ban on entry load would be in the interest of investors," said a person who participated in one such discussion some weeks ago.

Sebi is also in favour of pushing the Rajiv Gandhi Equity Saving Scheme, which seeks to provide tax breaks to first-time investors in equities, to be made available to investors through the mutual fund route.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/finance-ministry-sebi-looking-to-make-mutual-funds-attractive-for-distributors/articleshow/14480401.cms