Synopsis
Sebi has been consistently reducing the recurring expenses (TER) that can be charged by mutual funds, thus making it more investor friendly.
Expenses charged in a financial product by the provider should be fair on two counts. One, the customer should not be overcharged. Two, the manufacturer/distributor should be incentivised enough to take it up as a profession. What is fair is a matter of debate.
Sebi has been consistently reducing the recurring expenses (TER) that can be charged by mutual funds, thus making it more investor friendly. Not only the expenses, but the remuneration of distributors also is regulated by SEBI. Even though large corporate investors invest in some of the mutual fund categories, mutual fund as an investment vehicle is meant for the masses. The job of the regulator is to protect the interest of the investors and they are doing precisely that job.
However, certain aspects need to be debated.
One, mutual fund penetration in India has a long way to go. Apart from direct investors, the concept of MFs has to spread and that has to be done by distributors. For a distributor to survive by selling only MFs, the commission structure should be adequate. Trail commission is a sound policy for the long term, but for someone setting up shop, some upfront commission is desirable.
Two, SEBI is justified in keeping the expenses on the lower side since MFs are meant for the masses . There are products like AIFs with a minimum investment amount of Rs 1 crore and PMS with minimum quantum of Rs 25 lakh. It is assumed that these being for ‘evolved’ investors, they will be in a position to understand the nuances like expenses charged, how the distributor is being remunerated, etc. However, not everybody is as aware or as involved to understand the nuances of upfront, trail, etc.
For the sake of level playing field between MFs and the other vehicles, where AIF / PMS does not have cap on either expenses or upfront commission, one needs to look at how the leeway is being used.
Third, when we shift from MF-AIF-PMS regulated by SEBI to another regulator, IRDA, there is a sea-change in the leeway given. Upfront commission to insurance distributors, as a percentage of first year premium (apart from certain low cost products like term insurance) ranges from approximately 10 per cent to 30 per cent. It drops to approximately 7.5 per cent to 5 per cent in subsequent years, as a percentage of premium. What is relevant here is not so much the correctness of the data of 10 per cent to 30 per cent, but the stark contrast with MF distributor commission. The MF distributor, as per latest SEBI regulation, is supposed to get trail commission only i.e. zero upfront. As against this, 5 per cent to 30 per cent upfront in insurance products is a striking gap.
It is true that insurance as a product needs to be ‘sold.’ That is, pushed by the distributor and s/he needs to be remunerated for that. Still, if the regulator needs to be on the side of the customer in case of mutual fund products, why is it not so for insurance products? Are insurance customers son of a lesser God? Or, to look at it from another perspective, for spread of the mutual fund concept as a savings/investment vehicle, is it only about technology and ‘Mutual Fund Sahi Hai’ and not the incentive to the community doing it?