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Retail investors caught in MF distribution spin

Dinesh Narayanan

Mumbai , Jan. 23

THE current incentive structure encourages mutual fund distributors to hardsell mutual fund plans even when they do not fit the customer profile, leading brokers in the country admit privately. "It has become quite common for distributors to sell, for example, pure equity plan to a retired person -- completely wrong but brings good commission," one broker told Business Line.

Pure equity plans fetch the broker a commission anywhere between 1.5 per cent and 3.5 per cent with majority of managers passing on the entire entry load to them. When new plans are launched, they also get a fixed amount per application as additional commission. An industry insider said one AMC recently paid Rs 300 per application when it launched a new plan. Regulation allows such huge amounts to be accounted as issue expenses and amortised over five years.

Managers as well as brokers privately admit that ultimately it is the small investor who pays, but blame one another for the state of affairs. The chief marketing officer of a top mutual fund said, "We have to please distributors to sell our products. Since we do not have our own networks, we are completely at their mercy."

The CEO of a mutual fund complained that while one broker refused to sell his products because his company does not have a foreign tie-up, another insisted that the company give custody of at least one portfolio.

Yet another large distributor wanted a fixed sum as commission upfront, he added.

Brokers do not deny that they act tough when it comes to sharing customers. The head of a top distributor said, "Since managers did not bother establishing own set-ups, we obviously have a lot of power. But then we invest in people and our costs are high.

``Asset managers have, in their hyper-competition for AUMs (assets under management), lowered the entry and exit loads to ridiculous levels. Let them show performance and investors would not mind paying loads."

Apart from UTI Mutual Fund and a couple of other asset managers, no other AMC has any significant distribution set-up. Three top foreign banks and two large private sector banks dominate mutual fund distribution in India. These banks share and control among them the largest base of high net worth individuals and private clients, who comprise the bulk of "retail", which itself is at best 35 per cent of the Rs 1.5 lakh-crore industry.

A Government-sponsored study on `Reform of Mutual Funds in India' recently said: "The growing power of intermediaries presents some dangers for the retail consumer in that it transforms the basis of competition among product providers. Consumer weakness in understanding the nature of risk and return means the majority of consumers rely heavily on their advisers. As a consequence, the real customer for the product provider - the AMC - tends to be the adviser (distributor) rather than the consumer."

Mr A.P. Kurian, Chairman of the Association of Mutual Funds in India, recently told Business Line that the association cannot stop AMCs from incentivising distributors. Mr Kurian had, however, said he was not aware of any unethical practices.

Cadogan Financial, retained by Asian Development Bank to study the Indian mutual fund industry for the Finance Ministry, observes that no regulator has direct control over distributors. "So far as we can establish, there is no direct regulatory control over distributors by SEBI, and thus no ability to require them to report as to their business and their conduct of it; nor to inspect such entities. AMFI clearly cannot exercise such control, since it has no remit to do so," the report says.

In a telling comment on the state of the mutual fund industry in the country, Cadogan says: "It is hard to escape the conclusion that the whole industry is a sort of merry-go-round, where distributors, managers and large investors make money but others perhaps don't."

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