The Hindu Business Line : Cap put on MF sales expenses pie in exit load

Mumbai, July 1 The Securities and Exchange Board of India has put a cap of one per cent on the maximum amount an asset management company can retain from the exit load or the contingent deferred sales charges (CDSC) on mutual funds for marketing and selling expenses.

“Of the exit load or CDSC charged to the investor, a maximum of one per cent of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributors and to take care of other marketing and selling expenses”, SEBI said in a circular. The balance should be credited to the scheme immediately.

This would be applicable to redemptions from mutual fund schemes including switch-out from other schemes from August 1. Earlier, the entire exit load charged could be used for sales and marketing expenses by the AMCs but now it would be restricted, said the CEO of a mutual fund house.

The market regulator, which had said in June it would scrap entry loads for all mutual fund schemes, said this would be applicable from August 1.

This would also apply to additional purchases and switch over from one scheme to other schemes, new mutual fund schemes launched on and after August 1 and systematic investment plans (SIPs) registered on or after August 1.

If the AMC and the distributors want to make money there is a possibility that they could encourage an investor to exit one scheme and invest in another and encourage “churning” in order to earn from the redemption proceeds, said an industry official.

MF application forms will have to carry suitable disclosures that the upfront commission to distributors has to be paid to them directly by the investor.

SEBI clarified that distributors should disclose all the commissions payable to them for the different competing schemes of various mutual funds, one or more of which they may be selling to the investor.

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