Disclosing distributor commission: mutual fund industry is divided over impact

The question regarding how disclosing distributor commission to investors in mutual funds will affect their behaviour continues to split the industry down the middle.

In order to increase transparency in the industry, the Securities and Exchange Board of India (SEBI) mandated all mutual funds to disclose how much they pay as way of incentives and commission to distributors in the new Consolidated Account Statement (CAS) format.

From October 1, the CAS gave details on the gross commission paid to distributors for the half-year period against the investor’s total investments in each MF scheme. ‘Commission’ includes not just direct monetary payments but also gifts, trips, event sponsorships, etc. This is in addition to details of the investment, the number of units held by the investor in different schemes of the AMC and their current value.

Because many mutual fund investors are unaware of how much commission the distributors who sold them the products get paid, distributors believe this additional disclosure would shock investors, prompting them to withdraw their investments. Commission charges differ based on the kind of mutual fund — on certain equity funds it is as high as 250 basis points.

However, inflows into the industry remained strong post the disclosures. In November, December and January, net inflows into mutual funds stayed positive at ₹36,021 crore, ₹10,923 crore and ₹53,817 crore, respectively. One distributor, speaking to BusinessLine , said, “I think the effects of demonetisation nullified any impact that commission disclosures might have had on investors. But in the next CAS in April, I think investors are more likely to react.”

However, Rajiv Shastri, CEO of Peerless Mutual Fund, disagrees on the disclosures having any significant impact on investors. “I think a lot of smaller investors see the value in engaging with distributors. It takes away the headache of dealing with the AMCs.

“It’s not that distributors are making money and leaving investors in the lurch. I think investors will see the amount they are paying as distributor fees and if they feel it’s excessive, they might ask for a pass-back. But if they see a value-add in the services being offered, they won’t,” he said.