Investors could be spared from paying higher fees for investing in mutual funds. Securities & Exchange Board of India (SEBI), which regulates the mutual fund industry, is not very keen on accepting the mutual fund industry’s demand for higher incentives.
Addressing a summit on mutual funds organised by the Confederation of Indian Industry (CII) in Mumbai on Wednesday, SEBI Chairman CB Bhave said there is no case for increasing the incentives just because insurance companies are charging a higher fee.
“Our mandate is to protect the investors ahead of whether the industry grows or not,” Bhave told the industry gathering. The mutual fund industry has been asking for flexibility to charge higher fees from customers similar to the one that exists for the insurance industry. Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual funds. Running a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass on these costs to investors in a number of ways.
Under SEBI rules, mutual funds can charge up to 6 per cent from customers as entry fee — the amount fund houses charge customers for managing their money.
But most funds charge only up to 2.5 per cent due to competition. The commission mutual funds can pay their agents or distributors is capped at 2.5 per cent. Insurance companies deduct up to 40-45 per cent of the first premium paid as fees and can pay an equal amount as agency commission. Customer, who apply directly do not have to pay any charges.
The phenomenal growth of Unit Linked Insurance Policies (ULIPs), which are insurance-cum-investment products, has been posing a major challenge to the mutual fund industry.”In the year 2007-08, while mutual fund assets grew by Rs 52,000 crore, the insurance industry’s equity assets grew by Rs 88,000 year,” said UK Sinha, chairman, UTI.
AP Kurian, chairman, AMFI (Association of Mutual Fund Industries), pressed the case for regulatory intervention to create a level playing field for mutual funds and insurance companies.
“The entry of ULIPs is a disturbing phenomenon. These are positioned as investment instruments with insurance as an add-on. They have higher caps on charges. Can we leave such a situation to market forces?” said Kurian. “Allow us to charge fees in a transparent manner.”“If you charge lower fees and ULIPs charge higher fees that is bad for the investors, why has that message not reached the investors?” Bhave asked. He said it is a worrying aspect that this message cannot get through to the investors. He suggested that the industry should take up an investor survey and find out what investors feel about the competitive products and why do they buy those products.