Market regulator SEBI’s proposal to let mutual fund investors decide what they want to pay their agents failed to impress the participants at the ETIG Mutual Funds Round Table held last week. Bringing back rebating would be a more effective solution if SEBI wants to provide greater pricing power to investors, said MF house chief executives and distributors including Fidelity’s Ashu Suyash, Reliance ‘s Sundeep Sikka and HDFC Bank ‘s Abhay Aima among others.
Speaking to an audience of editors and reporters from ET and ET NOW, they said introducing a variable load system would only hurt the already feeble MF penetration in the country and open up a Pandora’s Box of consumer complaints.
Today, a small investor has to pay roughly 2.25% to get entry into an MF scheme, while large investments of typically Rs 1 crore upwards do not attract any loads. The regulator has proposed to abolish this and replace it with a system popular in more developed markets where the investors, big or small, control the fee. SEBI has proposed two options.
One, the investor, in consultation with his broker, can mention the amount of commission he is willing to pay on the application . Alternately, the investor can write two cheques – one for his investment amount and the other for the commission he would want to pay his agent.
While agreeing that Indian investors deserve greater pricing power, Vijay Venkatram of Wealth Forum, said: “If made operational in its current form, it will lead to a plethora of customer complaints and further confusion.”
Fidelity’s Ashu Suyash felt that merely “lifting” international practices could be detrimental to penetration of MF industry in the country. “When fund houses are working to attract investors from Guwahati to Nariman Point, our focus should be to come up with an improvement within the current regulations,” she said.
Ms Suyash pointed out that SEBI has already introduced no-load funds last year when it said that if an investor goes to a fund house directly without the assistance of a distributor, his entry fees would be waived.
The market regulator feels the current MF fee structure gives investor no control over the fees that the agent gets, especially if he is not satisfied with the latter’s advice.
Reliance MF’s Sundeep Sikka, however, argued that variable load structure will not necessarily lead to customer satisfaction as “valuing and quantifying advice” will always be a challenge. Panelists agreed that the problem could be solved if rebating is brought out from its closet and made transparent.
HDFC Bank’s Abhay Aima said reintroduction of “transparent rebating” will ensure better pricing, adding that the Indian MF buyer should not be underestimated . “If he can see through the bania at a neighbourhood kirana store, he can also figure out the banias in the MF industry,” he said much to the glee of the audience. SEBI is yet to announce whether it will go ahead with its proposal.
Bajaj Capital’s Rajiv Deep Bajaj said the move may be good in the long-term , but India is not yet ready for it. “It will empower investors but this may not be the right time for the move,” he said.
In 2002, Association of Mutual Funds in India (Amfi) and SEBI had banned rebating in MFs as most MF companies and distributors would pay back part of their MF fees to investors in a bid to increase their investors. Thus, an investor who paid 2.5% of his investment as entry fees of a MF scheme would get back about 1% of his investment either in cheque or cash.
The ban was brought in because the authorities thought this process was not fully transparent. Besides, there was a mounting fear that the distributor unduly influenced investor’s decision by offering a higher rebate, when his only job is to give advice. It’s the fund house that should be giving him (broker) the remuneration.
Speaking to an audience of editors and reporters from ET and ET NOW, they said introducing a variable load system would only hurt the already feeble MF penetration in the country and open up a Pandora’s Box of consumer complaints.
Today, a small investor has to pay roughly 2.25% to get entry into an MF scheme, while large investments of typically Rs 1 crore upwards do not attract any loads. The regulator has proposed to abolish this and replace it with a system popular in more developed markets where the investors, big or small, control the fee. SEBI has proposed two options.
One, the investor, in consultation with his broker, can mention the amount of commission he is willing to pay on the application . Alternately, the investor can write two cheques – one for his investment amount and the other for the commission he would want to pay his agent.
While agreeing that Indian investors deserve greater pricing power, Vijay Venkatram of Wealth Forum, said: “If made operational in its current form, it will lead to a plethora of customer complaints and further confusion.”
Fidelity’s Ashu Suyash felt that merely “lifting” international practices could be detrimental to penetration of MF industry in the country. “When fund houses are working to attract investors from Guwahati to Nariman Point, our focus should be to come up with an improvement within the current regulations,” she said.
Ms Suyash pointed out that SEBI has already introduced no-load funds last year when it said that if an investor goes to a fund house directly without the assistance of a distributor, his entry fees would be waived.
The market regulator feels the current MF fee structure gives investor no control over the fees that the agent gets, especially if he is not satisfied with the latter’s advice.
Reliance MF’s Sundeep Sikka, however, argued that variable load structure will not necessarily lead to customer satisfaction as “valuing and quantifying advice” will always be a challenge. Panelists agreed that the problem could be solved if rebating is brought out from its closet and made transparent.
HDFC Bank’s Abhay Aima said reintroduction of “transparent rebating” will ensure better pricing, adding that the Indian MF buyer should not be underestimated . “If he can see through the bania at a neighbourhood kirana store, he can also figure out the banias in the MF industry,” he said much to the glee of the audience. SEBI is yet to announce whether it will go ahead with its proposal.
Bajaj Capital’s Rajiv Deep Bajaj said the move may be good in the long-term , but India is not yet ready for it. “It will empower investors but this may not be the right time for the move,” he said.
In 2002, Association of Mutual Funds in India (Amfi) and SEBI had banned rebating in MFs as most MF companies and distributors would pay back part of their MF fees to investors in a bid to increase their investors. Thus, an investor who paid 2.5% of his investment as entry fees of a MF scheme would get back about 1% of his investment either in cheque or cash.
The ban was brought in because the authorities thought this process was not fully transparent. Besides, there was a mounting fear that the distributor unduly influenced investor’s decision by offering a higher rebate, when his only job is to give advice. It’s the fund house that should be giving him (broker) the remuneration.
TO SUM UP
WHAT?
Commission should be determined mutually between the investor and the broker/banker, depending on the service provided by the latter
WHY?
Current fee structure is linked to the size of the investment and has no correlation to the service provided by the distributor. SEBI also hopes to make the commision process more transparent
HOW?
Two proposals. First involves a separate section in the application form where the investor can tick how much he wants to pay. Or the investor issues a seperate cheque towards commission
WHEN?
Currently SEBI is studying the suggestions made by fund houses, distributors and investors. It is silent on whether it plans to go ahead with the move.
WHAT?
Commission should be determined mutually between the investor and the broker/banker, depending on the service provided by the latter
WHY?
Current fee structure is linked to the size of the investment and has no correlation to the service provided by the distributor. SEBI also hopes to make the commision process more transparent
HOW?
Two proposals. First involves a separate section in the application form where the investor can tick how much he wants to pay. Or the investor issues a seperate cheque towards commission
WHEN?
Currently SEBI is studying the suggestions made by fund houses, distributors and investors. It is silent on whether it plans to go ahead with the move.
