To check mis-selling of mutual funds, a Sebi panel is considering stronger checks against high upfront commissions paid by the fund houses to their distributors as it might be leading to forced movement of investors from one fund to the other.
It was felt that there is a need to better regulate the commissions paid to mutual fund distributors and adopt ‘a full trail model’ in due course in the interest of investors, sources said after a meeting of Sebi’s Advisory Committee on Mutual Funds held today.
It was also suggested that the commission for first year should only be few basis points above the trail commission paid in the subsequent years, as against the current practice of first-year payouts being very high.
Some fund houses currently offer up to 3-4 per cent of investment amount as the first-year commission, which drops to as low as 0.5 per cent in the second year.
“This prompts mis-selling and leads to the investors being persuaded to move from one fund to another fund,” an industry official said after today’s meeting.
The Securities and Exchange Board of India (Sebi), which regulates over Rs 11-lakh crore worth mutual fund industry, is considering fresh checks against mis-selling of mutual funds and flouting of ‘open bank infrastructure’ norms for sale of these financial products, while it looks at ways to boost the market penetration through use of mobiles and internet.
The panel also discussed other issues for development and regulation of this market while ensuring investor protection.
The Committee, which includes representatives of various fund houses, industry body AMFI and banks along with independent experts, also discussed issues relating to unclaimed dividend and redemption amounts, among others.
It has also come to Sebi’s notice that various mutual funds are forcing their promoting banks to sell only their own funds, thereby defeating the purpose of ‘open bank architecture’ that all fund houses are required to follow.
According to the industry data, some banks are getting more than 50 per cent of their brokerage commissions from single MFs, indicating a special focus on selective fund houses, which mostly happen to be their own group entities.
The issue has already been raised by some fund houses on various forums including at the level of AMFI (Association of Mutual Funds in India) and with the regulator Sebi.
The open bank architecture means that the products of any fund house can be sold by any bank, irrespective of the said bank being a promoter entity for the mutual fund.
There are a total of 46 mutual funds in the country and their total Average Asset Under Management currently stands at about Rs 11 lakh crore. The major players include HDFC Mutual Fund, ICICI Prudential MF, Reliance MF, Birla Sunlife MF, UTI MF, SBI MF, Franklin Templeton MF, IDFC MF and Axis MF.