Monday, September 28, 2009

Mutual Funds get step-motherly treatment from distributors

Distributors of mutual funds, are selling more of fixed income products, ever since SEBI (Securities & Exchange Board of India) introduced the abolition of entry load on mutual funds. Under the new norms investors must pay fees separately to the distributor as compared to the earlier practice where commission were paid out of entry loads charged by the mutual funds. If initial trends are anything to go by distributors are now earning more from selling fixed income products compared to mutual funds, in the changed environment .

In recent months banks have slashed interest rates on bank fixed deposits leading to a revival in interest in small savings, post offices and GOI (Government of India) bonds. Company fixed deposits which made a comeback due to reputed corporates like Tatas and Mahindras raising money, along with NCDs (non-convertible debentures) from Shriram Transport Finance and L&T Finance, have found favour with investors. As per distributors corporate fixed deposits worth Rs. 600 crore (Rs. 6 billion) per month are being sold. Shriram Transport Finance and L&T Finance both raised Rs. 1,000 crore (Rs. 10 billion) each, through NCD issues in August and September. Compared to this, fresh sales in mutual funds are down. For the month of August 2009, equity mutual funds registered fresh sales of Rs. 4,184 crore (Rs. 41.84 billion) against Rs. 8,885 crore (Rs. 88.85 billion) in July 2009, a drop of 52.9%. Contribution of fixed income products in our product mix has gone up from 10% to 20% year on year for the month of August 2009, says Rajiv Deep Bajaj, vice- chairman and managing director, Bajaj Capital.

On the other hand, contribution from mutual funds, which was 20% in 2008-09 , slipped to about 10% since the regulation was introduced on August 1, 2009. Distributors on an average would earn as much as 3% upfront commissions through entry load and trail fees from sales of mutual funds. This fee is now down to about 1%, including both upfront and trail, for smaller players, making selling of mutual funds unremunerative. On the other hand the company fixed deposits are assuring at least 1% upfront commissions. Sales of mutual funds are down by 40%, and investors are buying more of fixed deposits and non convertible debentures. As the equity valuations go up, investors are seeking fixed income products. This makes the product easy to sell for distributors in tough times.

Source: The Economic Times

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