Capping of upfront commission at 1 per cent and levy of service tax on distributors have put a spoke in the joyride of mutual fund industry. With the markets bouncing back to every bear attack, the cash register of the industry has not stopped ringing. G Pradeepkumar, Director, Association of Mutual Funds of India and Chief Executive Officer, Union KBC AMC spoke to BusinessLine on the two burning issues and prospects of mutual funds. Excerpts:

How do you see capping of commission to distributors?

The decision was taken by AMFI in consultation with mutual funds. If you consider the basic purpose of this move, there is no scope for debate. Excessive commission by some players for certain kind of products was probably leading to mis-selling in the market. This stoked SEBI’s concern and AMFI was asked to curb this practice. The decision was taken after lots of debate.

I am sure AMFI will look at all the feedback from the mutual funds, distributors and the regulator and review the decision.

What’s your response to concerns expressed by mid-level players?

I completely agree that different players have different business model. It may not suit everybody. We will redo it after getting the feedback. It will be reviewed in July.

How AMFI will tackle distributors’ concern on trail commission?

One of the suggestions that have come is to allow upfronting of the first year trail with a claw back. In my view there is merit in looking in to it.

Is close-ended funds losing sheen after commissions capped?

Even before the cap on commissions came when we launched the trigger fund we paid a very nominal upfront commission. Since we were getting our money in trail form we decided to pay commission in trail. We cannot say that we will upfront every thing because trigger fund can wind up as soon as target is achieved.

Will it become difficult to sell close-ended funds?

I feel close-ended funds have always been a risky proposition. You are talking point-to-point return being favourable. That’s a risky thing particularly when the market does not going one way up. If the date of maturity happens to be at the bottom of the market cycle then all the gains you made three or four years before on the upside will be wiped out.

What are suggestions AMFI is considering?

Just like service tax on management fee is passed on to the scheme, AMFI is looking whether this new tax on distributors can be loaded in the scheme. It is also considering whether the entire expenses can be taken as management fee. Idea is to find a solution that does not hurt anybody.

Will investors be affected?

If it is loaded to the scheme investors will be affected. It will not be very significant probably it is roughly 8 basis points. If your expense ratio is 2.5 per cent, just 0.8 per cent added to it is not going to be a killer.

Related Topics