By approaching the mutual fund house directly, investors in mutual funds may have managed to save on money that otherwise would have to be handed over to the distributor. But that still has not given them any immunity from the games played by fund houses.
These investors who should have been spared the burden of paying any trail fees — a part of the annual recurring charges that is paid to the distributor — are still paying these charges from their investments. So, while they are not paying the initial entry fees for getting into a fund, they are still losing around half a per cent of their investment value every year due to this creative accounting.
Trail fees are that part of the annual recurring fees that are paid to the distributor (from the investor’s NAV) for retaining the customer. Naturally, any investor who comes without the intermediation of a distributor is justified in claiming relief from this charge.
Earlier this year, Sebi had a passed a rule that allowed investors, who approached the fund houses directly, to save the fee that is otherwise charged for entering a fund, usually around 2-2.5% of the investment.
These investors who should have been spared the burden of paying any trail fees — a part of the annual recurring charges that is paid to the distributor — are still paying these charges from their investments. So, while they are not paying the initial entry fees for getting into a fund, they are still losing around half a per cent of their investment value every year due to this creative accounting.
Trail fees are that part of the annual recurring fees that are paid to the distributor (from the investor’s NAV) for retaining the customer. Naturally, any investor who comes without the intermediation of a distributor is justified in claiming relief from this charge.
Earlier this year, Sebi had a passed a rule that allowed investors, who approached the fund houses directly, to save the fee that is otherwise charged for entering a fund, usually around 2-2.5% of the investment.
Besides these charges, Indian mutual fund laws also allow MF houses to charge a maximum of 1% as investment advisory fees per year and a maximum of 1.5% as other expenses like administrative, registrar and custodian fees and so on. Both these fees are deducted from the investor’s money, bringing down the returns in the process.
“In a bid to boost their profitability, several MF houses are now charging trail fees (even for direct investors) under the other expenses head, disguising it with names like miscellaneous marketing expenses or other operating charges,” says a financial planner, who is empanelled with several fund houses.
ET sent emails to Reliance, ICICI Prudential and Fidelity AMCs on the matter, but failed to receive any responses. When contacted, Kotak Mutual CEO Sandesh Kirkire said fund houses were not charging more than the prescribed Sebi limits. “When fund houses charge investment advisory fees and other annual recurring expenses to a fund, they do it at the scheme level, not at the investor level. So, there is no difference made between an investor who comes directly and via a distributor.”
Distributors have not taken the direct application facility lying down either. They have been telling direct investors that they can arrange for direct applications, but insist on their name to be mentioned in the form for the service provided. So although these investors do not pay any entry fees, they have to cough up trail fees to the distributor every year. End result is the same — lesser returns.
When Sebi permitted direct applications, leading fund houses opposed the move saying distributors are vital in increasing the penetration of MFs in the country. Since then, direct applications have grown, albeit modestly to around 8-9% of the total investments.
“In a bid to boost their profitability, several MF houses are now charging trail fees (even for direct investors) under the other expenses head, disguising it with names like miscellaneous marketing expenses or other operating charges,” says a financial planner, who is empanelled with several fund houses.
ET sent emails to Reliance, ICICI Prudential and Fidelity AMCs on the matter, but failed to receive any responses. When contacted, Kotak Mutual CEO Sandesh Kirkire said fund houses were not charging more than the prescribed Sebi limits. “When fund houses charge investment advisory fees and other annual recurring expenses to a fund, they do it at the scheme level, not at the investor level. So, there is no difference made between an investor who comes directly and via a distributor.”
Distributors have not taken the direct application facility lying down either. They have been telling direct investors that they can arrange for direct applications, but insist on their name to be mentioned in the form for the service provided. So although these investors do not pay any entry fees, they have to cough up trail fees to the distributor every year. End result is the same — lesser returns.
When Sebi permitted direct applications, leading fund houses opposed the move saying distributors are vital in increasing the penetration of MFs in the country. Since then, direct applications have grown, albeit modestly to around 8-9% of the total investments.
Source : http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Analysis/Trail_fees_by_any_other_name_pinches_as_much/articleshow/3299673.cms
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