MF distributors to get fee from 1 pc of redemption proceeds

After scrapping the entry load on mutual funds,the Securities and Exchange Board of India (SEBI) has said a maximum...

After scrapping the entry load on mutual funds,the Securities and Exchange Board of India (SEBI) has said a maximum of one per cent of the redemption proceeds,or exit load,should be maintained in a separate account which can be used by the asset management companies (AMCs) to pay commissions to the distributor and take care of other marketing and selling expenses.

Any balance should be credited to the scheme immediately, said a Sebi circular. Sebi had abolished initial issue expenses and mutual fund schemes were allowed to recover expenses connected with sales and distribution through entry load only. Further,investors making direct applications to the mutual funds were exempted from the entry load.

In terms of existing arrangement,though the investor pays for the services rendered by the mutual fund distributors,distributors are remunerated by AMCs from loads deducted from the invested amounts or the redemption proceeds. SEBI (Mutual Funds) Regulations,1996 also permit AMCs to charge the scheme (under the annual recurring expense) for marketing and selling expenses including distributors commission.

Further,all loads including contingent deferred sales charge (CDSC) for the scheme are maintained in a separate account and this amount is used by the AMCs to pay commissions to the distributors and to take care of other marketing and selling expenses. It has been left to the AMCs to credit any surplus in this account to the scheme,whenever felt appropriate. In order to incentivise long term investors it is considered necessary that exit loads/CDSCs which are beyond reasonable levels are credited to the scheme immediately, Sebi said.

In order to empower the investors in deciding the commission paid to distributors in accordance with the level of service received,to bring about more transparency in payment of commissions and to incentivise long term investment,Sebi said the scheme application forms should carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor,based on his assessment of various factors including the service rendered by the distributor.”The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor,” Sebi explained in the circular.

The new rules will be applicable for investments in mutual fund schemes (including additional purchases and switch-in to a scheme from other schemes) with effect from August 1,2009.