MFs get around no-entry load rule

The 19th century French journalist had — wittingly — coined an epigram for posterity: The more things change, the more they remain the same. He said so in circa 1850. Flash-forward one and a half centuries.
Plus ça change…

Till Friday, July 31, mutual funds were allowed to charge an entry load from investors investing in a scheme. This was typically 2.25% of the net asset value of the scheme at the time of investment. The money so collected was used to pay commission to the agents and distributors of funds.

But Sebi banned the practice with effect from August 1. So how do funds compensate their selling agents and distributors who herd in the millions of investors now?
The fund houses are doing two things: First, they are either introducing an exit load of 1% in their schemes, or extending the applicability of exit loads from six months to three years.

Exit load, remember, is the fee collected from the investor when he exits by selling the units he holds. Secondly, funds are also paying upfront commission from their own pocket to distributors and agents.

Reliance Mutual has extended the exit load tenure applicable on 14 schemes from a period of 6-12 months to three years.
The likes of SBI Mutual, ICICI Prudential, Fortis, Fidelity and others, have also extended the period of applicability of exit loads from a minimum of six months earlier to three years.

Some of these funds never had an exit load. “We want to encourage long-term savings and hence discourage investors from exiting early,” the marketing head of a leading mutual fund told DNA Money, explaining the move even as he sought anonymity.
But what the industry does not want to admit, is the fact that the current mutual fund regulations allow them to pass the exit load as commission to agents and distributors.

And hence the hurry to either introduce exit load or increase its period of applicability.
The head of a mutual fund distribution chain operating in five cities in India, says, “Distributors have to be paid from somewhere. As Sebi has said that 1% of the exit load can be given to agents as commission, schemes that did not have any exit load have introduced it.”  Paul D’Souza, who runs investment advisory Cuzinns Investment Services in Mumbai, says, “Funds that introduced exit loads are now increasing the term of the exit load.”

Sebi had on June 30 clarified: “Of the exit load… charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the asset management company to pay commissions to the distributor and to take care of other marketing and selling expenses.” Industry watchers say the move will ensure that agents will now get that 1% of the exit load up to 3 years.

The national sales head of another mutual fund said he may not give the exit load commission “to any and every advisor”.

“We will look at the investment that has been generated from the distributor and only then will we allocate the funds,” he said, requesting anonymity. Some fund houses have decided to pay from their own pockets.

DNA  is in possession of emails sent by SBI Mutual Fund and Morgan Stanley Mutual Fund to its distributors explaining the new commission structure. SBI Mutual has decided to pay its agents an upfront brokerage of 0.5% if the investment being made is less than Rs 5 crore. For investments of Rs 5 crore and above, no upfront brokerage is payable.

Morgan Stanley Mutual has decided to pay its agents and distributors an upfront marketing fees of 0.9%, if the amount being invested is less than Rs 5 crore. If the amount being invested is Rs 5 crore or more, the marketing fees comes down to 0.25%.

Fund houses, however, are not calling this upfront payment “commission.” That’s because the June 30, 2009 Sebi release clearly said, “The upfront commission to distributors shall be paid by the investor to the distributor directly.” That does not seem to be happening and the funds are paying the distributors out of their own pockets.

Asked whether fund houses will pay from their own pockets to keep distributors happy, Avinash Ramnath, national sales head at Canara Robeco Mutual Fund said “It is not sustainable in the long-run.”

What’s more, the trail commissions, paid to agents and distributors on the basis of how long the investors stays invested in the scheme, are expected to go up, says D’Souza, of Cuzinns Investment Services.

So, bring on the Beatles, someone:
Ob-la-di, ob-la-da, life goes on, brah!...
La-la how the life goes on...