Mutual Fund Disclosures: Investing with greater transparency

Some analysts say that the disclosure with respect to absolute amount paid in commission and a comparison of TER in direct and regular plan will dissuade investors from taking the distributor route for investment.

Written by Sandeep Singh | Published: March 22, 2016 2:06 am
Mutual Funds, Mutual Funds in India, Mutual Funds india, pension, pension scheme, new pension scheme, new pension scheme in india, new pension scheme details, business news There are some who are calling for Sebi to take more steps for increasing mutual fund penetration.

The Securities and Exchange Board of India’s (Sebi) latest move asking mutual funds to disclose the actual amount paid as commission to distributors and also to provide details of expense ratio of direct and regular plans in the consolidated account statement issued to investors, has evoked strong response from the industry.

While some industry leaders posted their comments on Twitter and expressed their discontent, several distributors and industry experts are not only questioning the relevance of such move but are also calling for similar disclosures in case of other financial products.

While there is a perception that such disclosures may potentially influence unqualified retail investors to take the direct investment route and thereby force some distributors to exit the industry, there is also a view that there has to be uniformity in the levels of disclosures in case of various financial products for which various regulators will have to come together and decide on the same.

In a tweet on Monday, Sundeep Sikka, CEO, Reliance Capital Asset Management said, “Too frequent and disruptive regulatory changes for MF distributors can have a very negative impact on growth of AMC industry itself.” Nilesh Shah, MD of Kotak Mahindra AMC tweeted, “Hope insurance industry follows transparency standards of mutual fund industry in disclosing agents commission to investors.”

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The reactions follow Sebi’s Friday circular that asked mutual funds to provide additional disclosures to investors in its consolidated account statement. The circular said that in order to increase transparency of information to investors, it has been decided that the CAS should provide, “The amount of actual commission paid by AMCs/Mutual Funds to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme.” It further said that in its half-yearly account statement issued to all mutual fund investors the fund houses will also have to provide the scheme’s average Total Expense Ratio (TER) for both direct and regular plan, in which the concerned investor has invested. Sikka said that while disclosures are good, it has to be relevant to the investors.

In case of direct plans, the investors are provided with the option to invest directly in the scheme of a fund house and thereby save on the commission that otherwise is required to be paid to distributors in case of regular plans. If an investor invests directly in equity schemes the TER is lower by 50 – 100 basis points (100 basis point is 1 per cent) in comparison to a regular plan.

While fund houses already disclose the TER for each scheme currently, some feel that the disclosure with respect to absolute amount paid in commission and a comparison of TER in direct and regular plan will dissuade the investors from taking the distributor route for investment.

An industry insider said that the role of distributor can’t be undermined. “The mutual fund penetration continues to remain very low and distributors play a key role this as they approach a new customer and handholds him through the investment process,” said the head of a mutual fund who did not wish to be named. But not everyone is opposed to the high levels of transparency proposed by the regulator and believe that the move will push greater transparency and help investors take informed decision. “It does not come as a surprise as the objective of more transparency has been under discussion over the last couple of years. It is a right thing to let the investor know how much of his TER is going to the distributor as commission and is he providing enough value for that money. It will push us to fortify our value for the investor and further upgrade our services,” said Rajiv Deep Bajaj, vice chairman and MD, Bajaj Capital. Stating that direct plans are for evolved investors, Bajaj proposed that the regulator should allow direct investment in mutual funds only for qualified investors who clear certain certifications.

While the debate continues in the mutual fund space, there is a growing demand for similar transparency in distributor commission for insurance products and the head of a leading financial services firm said, “Even we don’t understand the structure in case of traditional plans, though it is better structured for new generation products.” He also said that insurance sector will benefit as a result of these disclosures as small distributors may move out and start selling insurance products.

There are some who are calling for Sebi to take more steps for increasing mutual fund penetration. The head of a mutual fund company who did not wish to be named said that over the years, entry of new retail investors in the capital markets has not grown much. “Some initiative like the Pradhan Mantri Jan-Dhan Yojana should be initiated to get more and more retail investors in capital markets,” said the insider who did not wish to be named.

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  1. Rajeev Bagra
    Mar 28, 2016 at 12:53 pm
    It is tough for an individual mutual fund intermediary making his/her living from commissions earned through selling mutual funds coming to know one fine day that if he/she has the best interest of clients in mind, let them inform about switching to direct plan as the same will bring buyers of mutual fund deal directly with the company issuing mutual fund (AMC or et Management Company) instead of him/her (intermediary) earning commission thereby increasing cost for;br/gt;lt;br/gt;The hard truth is that online platform whereby a buyer can come in direct contact with seller has changed the distribution channel across sectors including insurance, mutual fund, real estate decreasing importance of so-called brokers/middlemen/distributors/;br/gt;lt;br/gt;One suggestion here for AMFI regulating mutual fund in India is to come out with a web page for each distributor like whereby as an AMFI registered mutual fund advisor, I am allowed to showcase my profile, contents (recommendations/blog/article/audio-video content) while side-by-side allowed to post ads (like AdSense, affiliate ads from the likes of Amazon, SnapDeal, Flipkart) income of which is credited to my account. Given the fact that more and more transactions are done online, for new-age distributors, it is pertinent to start blog/website, leverage social media and find newer ways of generating revenue side-by-side. lt;br/gt;lt;br/gt;For distributors, instead of getting angry/worried, there is a big rural India market where awareness level of mutual fund is lower than insurance. According to a 2014 study by SEBI Penetration of Mutual Funds in India: Opportunities and Challenge, "low number of agents (per capita) in sub-urban and rural areas and the slow growth rates in mutual fund s in the corresponding areas are closely ociated with each other." Instead of generating content yourself, trick can be using/sharing contents generated by govt. bodies/media houses by bringing it right in front of a prospect in vernacular language. Golden rule in direct selling of keeping informative brochures ready while meeting a prospect one-on-one can work wonder. lt;br/gt;lt;br/gt;As always for an individual, it is risky relying only on selling mutual funds and perhaps most distributors are also involved in other verticals (istance in efiling, insurance, equity to name few). This also gives leverage to forego commission (as in direct plan) or fees (which anyway is difficult to extract) as the same can be compensated from clients with other value added services.
    1. Rajeev Bagra
      Mar 28, 2016 at 12:55 pm
      #MutuaFund #DirectPlan
      1. U
        umesh Naik
        Mar 30, 2016 at 1:58 pm
        All other goods like cars , medicines etc etc should be made directly made available at companies outlets. If one has to buy medicines than comission s goes to CNF , distrubutor , chemist and in the process customer pay very high price for the goods he picks. Looks foolish but it will allow customer to buy goods at very cheaper rates. And why to disclose the distributors comissions only in finance Industry. When I buy car Ishould know how much the dealer makes. Even SEBI S directors ries should be disclosed uot side his cabin and should be checked is it worth paying that much ry.