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Lower cut for agents slashes MF count in a rising market

Fund houses have not been enthusiastic in launching new schemes despite record inflows into mutual funds (MF) this year that has led to a sharp rise in assets under management and improving the fundamentals of equities as an option for investments.

business Updated: Jul 13, 2016 11:29 IST
Nachiket Kelkar
Mutual funds

Sebi has toughened norms for mutual fund houses and asked them to reduce upfront commissions for agents. This has led to fund houses going slow on launch of new MF schemes.(Reuters)

Fund houses have not been enthusiastic in launching new schemes despite record inflows into mutual funds (MF) this year.

As on June 30, the total assets under management in equity funds, or simply put, the total investments made by such funds, totaled Rs 3.82 lakh crore, compared to Rs 3.33 lakh crore last year. However, between January and June this year, only nine pure equity mutual fund schemes were launched, compared with 37 schemes launched in the same period last year. For the full year 2015, about 60 equity schemes were launched.

This has come as a surprise as equities have become the most popular asset of choice, with prospects of other traditional options like real estate and gold dimming due to very low returns. Typically, in times of bullish trends, equity houses introduce new MF schemes to take advantage of the rising interest in capital market and earn more.

According to MF industry veterans, falling ‘upfront’ commissions, or the fees earned in promoting and pushing MF schemes, is a major reason for the lack of new products. “The regulator capping distributor commissions has affected close-ended funds. Earlier for such funds, commissions were paid up-front, which now, can’t be paid and that has affected the plans,” said Nimesh Shah, MD and CEO of ICICI Prudential AMC, the country’s largest fund house.

Upfront commission is the payment that fund houses pay distributors to sell mutual fund schemes. Earlier, distributors were paid 3-4% of the investment amount as first year commission; in some funds it was as high as 6%. So, if a person would have invested Rs 1,000 in a mutual fund, Rs 30-60 would have gone to the distributor as the first year commission itself.

“Since the restrictions on the upfront commissions there is a lot less incentive in terms of distributors and AMCs’ ability to push distributors to promote new fund launches,” says Srikanth Meenakshi, co-founder of fundsindia.com.

Market regulator Securities and Exchange Board of India toughened norms for mutual fund houses and had asked them to reduce upfront commissions last year. The industry body Association of Mutual Funds of India (AMFI) has since capped it at 1%. The regulator has also told fund houses to merge similar nature schemes, to make investment decisions easier for investors. The rate of approvals has also reduced, unless a new scheme is significantly different from what a fund house already has. So, if a fund house already has a large-cap equity fund, it may not get approval for a new scheme, which aims to invest in similar basket of stocks.

“The scope for launching a new fund, which will not clash with an existing fund, is less. Sebi doesn’t give approval for schemes if it is overlapping with existing schemes,” said A Balasubramanian, CEO of Birla Sun Life AMC. So, to cash in on the retail investor demand, fund houses are now increasing their marketing on existing schemes which had strong returns in the past.