Mutual funds to get more leeway to pay more commission to distributors

By ET Bureau 3 Jul, 2012

Experts said an increase and flexibility in managing expenses will help boost the fortunes of the mutual fund industry.

Distributors want Sebi to get rid of the slab system for calculating expense ratio.

Dhruv Mehta, chairman of Foundation of Independent Financial Advisors, who was part of the meeting, said, "The current slabs need to be revised upwards in line with inflation.

Lower slabs make it more difficult for new fund schemes to grow as the break-even level for new fund schemes has increased substantially."

At present, MFs are allowed to charge up to 2.25% (in funds with assets over 100 crore) as expense ratio. Of this, fund houses are allowed to accept only 1% as asset management charges; the remaining 1.25% has to be mandatorily used to meet recurring expenses, including payment of annual trail fees, auditor and registrar charges and dealing charges to empanelled brokers.

Service tax issue pending too

Dhirendra Kumar, CEO of Value Research, feels that while increasing expense ratio is a good idea, it should be allowed for one to two years to help the industry tide over tough times.

According to Sunil Jhaveri, chairman of MSJ Capital, a leading MF distributor, allowing AMCs to charge an extra 25 bps expense may not make a material impact on the MF industry.

"AMCs were expecting entry loads to come back and this announcement closes that window. It will only give leeway to MFs to either increase brokerage structure to their distributors by extra 25 bps or retain some portion of it for the bottom line of the AMCs," said Jhaveri.

The government and the industry have to also thrash out who pays the service tax because distributors have been exempted from the tax from July 1. While the industry wants service tax to be recovered from investors, some brokers believe that such a move will put off most customers.

"The proposal to exclude service tax from expense ratio may reduce fund returns by some measure as overall cost of managing funds would go up. Service tax, charged separately from investors, will take total expenses incurred by investors from 2.25% currently to about 2.8%," said Kumar.

Said Sinor after the meeting: "We have not raised the entry load issue. Only distributors mentioned it. It is a three-year-old matter and the MF industry did not believe in reviving the issue."

In 2009, the then Sebi chief, CB Bhave, had banned the 2.25% entry load on mutual funds, most of which went to distributors as commission, as he felt the levy was unnecessary and often abused. Current Sebi Chairman UK Sinha has supported his predecessor's decision, describing entry loads as anti-investor.

The abolition had the unintended consequence of reducing flows as distributors stopped pushing mutual funds. Assets managed by equity schemes fell 11% in the 12 months to May to Rs 1.67 lakh crore.

The ministry had called a meeting, attended by Sebi officials, representatives from mutual funds industry and financial advisors' association, to evolve a common strategy aimed at reviving the fortunes of the industry confronting declining gross asset mobilisation since 2009-10.

The finance ministry is also looking at giving special emphasis on improving the penetration of mutual fund products in tier II and tier III cities.