1) Mutual fund Asset Management Companies (AMCs) take around 1-2.5% of all the equity assets they own. Equity funds are lucrative in comparison with debt funds where a mutual fund can’t usually charge much.
2) Even with no entry loads, fund houses are paying distributors commissions. These range from 0.5% to 1.5% upfront (as soon as the investment is made) and 0.5% trail (for every year). How do I know this? I’m a registered mutual fund distributor. (though I only use it for family investments)
3) How does this work? The fund house expects to recover the payment in a year, as it can charge upto 2.5% as management and marketing fees. They just take this out and work the accounting for a year. If you try to exit early, you get tacked on with an exit load of 1.5-2%, which covers the cost. (Try finding an equity fund without an exit load today)
4) If an investor goes direct, no one gets paid. Or so we think. In reality the fund house charges the same management fee whether we go direct, or though a distributor. If profits won’t go to distributors, the AMC will keep it.
5) If you pay a distributor for assets, why not directly pay the investor? For any direct investment offer customers a free 1% add-on (in terms of units) into their portfolio at the end of one year of holding. And for every subsequent year, add 0.5% through units. These units must be necessarily free of exit-load, of course.
6) There are some complications – like the concept of a “bonus” creates different tax issues. And getting SEBI on board.
7) A better way to do it would be to put direct investors into a separate scheme where management charges are much lower. But that doesn’t make people feel as good as getting paid – out of their own money, no doubt – to invest!
Just a thought. I started doing this on twitter and realized the blog format is better. Tell me what you think!