Having faced regulator’s flak for paying high upfront commissions to their agents, mutual funds are discussing a proposal for doing away with such one-time payments and replacing it with smaller amounts staggered over a longer period of time.
The issue was discussed by industry body AMFI during its board meeting last week and would come up again for further deliberations during a meeting scheduled this week.
The matter at the centre of discussion is payment of upfront commissions, which have been very high in some cases in recent times amid a surge in capital markets, by mutual funds to distributors for selling their schemes.
Last month at the Annual General Meeting of AMFI (Association of Mutual Funds in India), Sebi chairman U K Sinha cautioned the fund houses against high upfront commissions to mutual fund distributors.
Upfront commission is the additional sum of money that fund houses pay from their own pocket to MF distributors who are selling their equity funds.
Generally, fund houses pay 1.5-2.5 per cent as upfront commission to distributors to push their equity schemes, but it has reportedly risen to as high as 8-10 per cent in some cases.
“The issue of scrapping upfront commission was discussed at AMFI’s board meeting. There has to be some kind of rationality in paying out commissions to distributors,” AMFI CEO Hoshang N Sinor told PTI over phone. He, however, added that nothing has been finalised yet.
“We will call another board meeting of all 15 members this week to discuss the matter further,” he added.
According to industry experts, a high commission strategy could impact profitability of Asset Management Companies (AMCs) in the long-run.
“Fund houses have become desperate to garner assets, mainly after change in taxation rules for the debt category in the Budget. The changes in rules are widely expected to result in a decline in overall debt AUM (assets under management),” an industry expert said.
During 2013-14, income earned by distributors from selling mutual fund schemes surged 9 per cent to a staggering Rs 2,572 crore, driven by improved market conditions.
This income was garnered by a total of 329 distributors.