Indian money managers are rushing to launch new products before Aug. 1 when a new rule comes into effect prohibiting charging of entry fees by the firms, making it harder to sell them, analysts said.
Units of BlackRock, Franklin Templeton and JPMorgan launched stock funds last week, while Religare Asset Management will open one on Tuesday and smaller managers like Sahara Mutual Fund and Quantum Asset are also in the fray.
The trigger is the 31.5 billion rupees collected between two stock funds from India’s No. 1 mutual fund firm Reliance Capital and ICICI Prudential Asset Management in April-June after a near drought in fund flows for a major part of 2008 and this year.
But the rush to launch funds in July itself is largely driven by a ban on entry fees of about 2.5 percent that asset managers charge investors, which is used to pay hefty commissions to distributors to push their products.
“AMCs are looking for ways and means to bring in as much collection as possible in this particular month,” said Krishnan Sitaraman, head of fund services at CRISIL.
Once the rule comes into force on Aug 1, the flows would slow as investors and distributors will take time to settle into a fresh compensation model which requires advisors to charge a fee directly from clients.
That is making fund houses to go all out to collect funds before the deadline, Sitaraman said, as they can still pay from the entry load, making the deal sweeter for distributors. The next few months “are definitely going to be lean months.”
Even though sentiment has improved after the recent share surge and funds might get some success by exploiting the last chance to pay distributors out of entry fees, concurrent new launches may result in few collecting any significant amount.
Investors, who are yet to fully regain risk appetite after losing nearly half of their stock portfolio values in 2008, are also unlikely to fall for the new funds and may wait for August when the 2.5 percent entry fee will cease to exist.
Many funds also charge an exit fee of 1 percent or more and may raise it further to pay distributors, adding to the cost. India allows funds to charge up to 7 percent as exit fee.
“It does not make sense as the cost of buying a fund goes up significantly as you would be paying entry load and then exit load,” said Chintamani Dagade, a senior research analyst with Morningstar India.
In fact, the same funds could be bought without the entry loads once they re-open after initial subscription and investors could lower expenses by negotiating a better deal with advisors.
India’s stock market regulator said last month mutual funds can not levy any entry charges for investments but allowed distributors to claim a fee for their advice from investors. It also directed them to disclose commissions earned to clients.
While it will make investments transparent and cheap, the ruling will prevent fund houses from launching too many funds as they will have to spend more on marketing and selling.
Distributors, whose compensation would now depend on how long the investments stay with a particular fund house would also not be too eager to sell new funds as an existing fund with a proven track record would be much easier to sell.