‘Free-look period unlikely to work in MF environment’

The Sumit Bose committee report on measures for curbing mis-selling and rationalising distribution incentives in financial products recommended, among others, introduction of a free-look period for mutual fund schemes, removing fungibility of cost caps and upfront commissions, besides doing away with the extra 30 basis points expense ratio allowed for business generated beyond the top-15 cities.

In an interaction with BusinessLine Jimmy Patel,  Chief Executive Officer, Quantum Asset Management Company, provided insights on how the free-look period is not for mutual funds while agreeing that upfront commission and extra 30 basis points for sale for schemes beyond the top-15 cities should be done away with. Edited excerpts:

The Sumit Bose committee has suggested introduction of a free-look period for MF schemes? Your take on this please.

When one is making an investment, what does a free-look mean? Free-look does not work in an MF environment — then why should a customer sign a form that I understand the details of the scheme before investing. It is an interesting concept but there are issues related to NAV, such as who will bear the difference in NAV in case the NAV goes down during the free-look period, the customer or the fund house.

The committee is against fungibility of cost caps within an overall total expense ratio? Would this work?

Fungibility/non-fungibility won’t solve the problem, disclosure of expenses will. Because of fungibility, fund houses do not disclose the break up of their expenses. 

The Bose committee further recommended that upfronting commissions be removed and distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital. Your comments.

  Upfronting is not beneficial to new entrants in terms of fair play. Only those AMCs with old assets generating cash find it beneficial to pay upfront commissions. While independent financial advisories are to be supported, support does not mean setting up the business with AMC commissions. Only when AMCs generate money can they pay a trail commission. AMCs have started paying high trail commissions — ranging between 1.5-1.75 per cent.

Competition has not reduced costs much below the expense ratio that was fixed when the AUM of the industry was much lower. Should the regulator not lower the cost caps as the industry AUM rises over time? What is your opinion?

 The high cost caps for funds cross subsidise the low-yielding ETFs and liquid funds that fund houses offer.

Should the extra 30 bps for sale of MF schemes beyond the top-15 cities be done away with according to the Bose panel report?

Why should one differentiate between two sets of customers entering the system based on geography? Why should one cross-subsidise the other?

Are schemes conforming to the benchmarks chosen?

  What is important is relevance of benchmarks chosen. Multi-cap/ blue-chip funds usually choose relevant benchmarks but tax savings/ derivatives/ gold savings funds are vague when it comes to choosing a relevant benchmark.

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