The Hindu Business Line : `MF investor giving away more to distributors'

Here's a calculation that may make the average mutual fund investor, perhaps typically unaware of the impact of distribution costs, uncomfortable. It underlines a simple truth: Investors are probably giving away more to distributors than what is good for them.

The math, worked out by Quantum Mutual Fund, which tries to reach out to investors directly, refers to the Sensex, which has been delivering a compounded annual return of 20 per cent over the past two decades and more.

It also assumes that the same compounded annual growth rate (CAGR) will persist for the next 25 years or so.

An initial investment of Rs 1 lakh is assumed in two funds - the first is distributor-driven, while the second is a direct-to-investor product that has bypassed traditional distribution channels. The fund house has also assumed that the two are "equal" in all other ways and the fund managers make the same returns even as they take the same risks. "Initially, if 5 per cent of the money is given as commission and incentive fees by a distributor-led fund to a distributor, it would mean an immediate decline of Rs 5,000 in the amount available for investment in the stock market," Quantum has observed, assuming that `other expenses' amount to Rs 2,000 in both cases. In such a situation, the low-cost fund, which has Rs 98,000 to invest, gives higher returns than the traditionally sold fund, which has a kitty of Rs 93,000. A 20 per cent rate of return and a 2 per cent other expenses are now factored in for both, while the distributor-led fund records a 0.5 per cent `other distribution costs'. Its net return is 17.5 per cent, lower than the 18 per cent booked by the direct-to-investor fund.

Mr Arjun Marphatia, CEO, Quantum MF, notes that the illustration is aimed at enabling investors to take better decisions, keeping in mind the actual cost of investing in conventionally sold funds (compared to low cost products).

Quantum maintains that promotional efforts and distributor commissions are often aimed at increasing asset bases. The larger the asset the higher is the management fee income.

Many of these costs and expenses may be paid for by investors' money, it has mentioned.

Distributors, however, point out that they are doing a crucial service by bridging product manufacturers (that is, asset management companies) and consumers (that is, investors).

Many of them have wide networks of offices, which help a wide section of investors to access mutual funds.

"Yes, conventional distribution does present a cost. But in many cases the benefits outweigh what can be achieved without such customary intermediation," explained a distributor without wanting to be identified.

Funds, which mostly cannot run their own set-ups in far-flung areas, have limited access to certain markets across geographies.

Distributors, through their efforts, can bring in best practices and improve standards of service, it is felt.

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