AMCs Want MF Buyers To Bear Distributors' Bill

A section of asset management companies is learnt to have approached the Securities and Exchange Board of India, seeking changes in the existing distribution fee structure in line with some of the advanced markets. The proposal, coming on the heels of the SEBI's plan to waive the entry-load, involves introduction of variable fee for the distributor's services to an investor buying. The proposed model, which is similar to the structure prevalent in the stock-broking industry, allows distributors to add value to its services to clients, without impacting the net asset value (NAV). In August, the market regulator had proposed that investors who approach the mutual funds directly, rather than the existing practice of routing their investments through distributors, should not be charged the entry load of 2.25% for equity funds. Entry load is the commission a mutual fund charges an investor to meet its expenses in selling a scheme. The proposal, if implemented, is expected to boost investor returns. At present, an investor hands over an amount to a distributor who gives it to the fund house. The fund house deducts the entry load from the amount and gives it to the distributor, who unofficially parts with a small portion of this money to the investor. So, hypothetically speaking, if an investor puts Rs 1000 in a scheme and the entry load is 2%, he would receive units worth only Rs 980. In the current structure, it is felt, investors are being denied the entire benefits of the investment.

In the proposed variable fee-based structure, the client pays the distributor a certain fee for the advice, over and above the investment amount. So, hypothetically, if an investor intends to invest Rs 1,000 in a scheme, he gets units worth the entire investment amount, rather than Rs 980 worth of units. This is because the investor pays a separate fee to the distributor for his services. A key aspect of this structure is that the payment of commission to a distributor varies from one investor to another. That is, the commission depends on the kind of services that the distributor provides to the investor. The stock broking industry follows a fee-based structure where an investor pays the broker a fee for the services offered to him. The fee, known as brokerage, varies from client to client.