The Hindu Business Line : AMFI fine-tuning norms to check mis-selling

IN a bid to clean up the industry and put an end to mis-selling, the mutual fund industry is suggesting various reforms and is expected to table these recommendations to Securities and Exchange Board of India shortly.

The Board Members of Association of Mutual Funds in India (AMFI) is meeting on Wednesday to consider the final recommendations.

Aggressive churning of portfolios by distributors to earn higher commissions has been plaguing the industry. In the last 18 months, there have been several new fund launches and fund houses have been pushing up commissions to distributors to report substantial mop ups during the initial offer periods of funds.

Distributors, on their part, advise clients to withdraw their money from existing funds and invest that in these new funds. Investors are not always made aware of losses due to exit and entry loads that accrue from switching from one fund to another.

It is understood that the AMFI committee is recommending annualised commissions to distributors to prevent this. Distributor commissions during initial public offers (now called new fund offers) are as high as 5-7 per cent currently.

Another aspect of mis-selling that has been brought to AMFI's notice is about amortisation of issue expenses. Currently, SEBI provisions allow that initial offer costs of the fund can be amortised over a period of five years. This implies that investors who remain invested in the fund for longer periods of time absorb higher costs of issue expenses.

For instance, if an investor redeems in two years he pays much less towards initial issue expenses than one who remains in the fund for five years.

Also, the net asset value of the fund announced does not take into account these expenses that are amortised. If a large chunk of investors redeem, they could leave a significant gap between the net asset value of the fund and the actual value of assets in the fund.

The AMFI Chairman, Mr A.P. Kurien, said a note seeking suggestions has been circulated to all members and responses have come in. "One round of discussions has already taken place. Now the board will meet during this week to take a final view," Mr Kurien said.

The AMFI board meeting will take these suggestions into account before making its final recommendations to SEBI.

AMFI members in the know said that some of these recommendations would involve changes in regulation and would be mandatory in nature. Others could be left as `best practices' and fund houses can implement them as and when they deem it necessary.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
FBT fails to sting — Cuts into only 1.1 pc of PBT in Q1

PM's nod for ONGC project in Mangalore

Trying times ahead for TV news channels

It's up, up hurrah, thanks to fund flow

Local issues may hamper FDI flow in realty sector

Shortage of investigators may upset clinical trials applecart

AMFI fine-tuning norms to check mis-selling