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Personal Finance

Paying Mutual Fund Investors To Invest

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!

  • Srikanth Meenakshi says:

    >This concept assumes that AMCs don't incur any charge for directly servicing the investors. The investment service centers they have in multiple cities, the staff that work there, the processing of applications, the technical infrastructure to record, transmit and follow-up on service requests all cost money. The AMCs do the accounting math for how much it costs to directly service investors for the volume that comes through that channel. If they deduct those expenses and pay the rest out, the investor can take that money and five rupees from his own pocket and get a cup of tea in the corner shop. 🙂

  • Deepak Shenoy says:

    >Srikanth, they have those costs anyhow – they still pay the distributors no? Expanding infra to meet direct investors needs is largely a function of CAMS/Karvy spreading their reach, for now. In fact direct investing through the stock market model – which has not yet taken off but has serious potential – can be hugely increased with a pay-the-customer model; it makes direct investing much easier.

    And, the largest pain is the first time investment (the paperwork). After that it's very smooth and can be done online, or otherwise. There's not much cost for those investments for which distributors still get paid – might as well pay investors direct.

    In any case, the bonuses can be whittled down in say three years. But I doubt this concept has any takers right now.

  • YoursTruly says:

    >Whats the criteria to become registered mutual fund distributor?

  • Ranjan says:

    >There's one way. In insurance you can have an association of people who can be covered under Group Insurance. And it's damn cheap. One example is the group insurance worth Rs 24000 crore for all Infosys employees by LIC.

    Can we think of an investor group, which has similar questions on loads, come together and invest as a group. They can negotiate with the AMCs for the best deal!! Hypothetical now, but possible indeed.

  • subramoney says:

    >I frankly do not care about charges when I am investing, but I need a separate NAV to avoid the trail commission. Fund distributors make money just because the fund manager is performing well. For e.g. I have 10 year money in Templeton Growth fund where some distributor is enjoying the trail. Frankly Deepak for me honesty: competence is a 9:1 requirement. This means I can look only at 2-3 fund houses. Even if they treat me like a dog but give me 24% CAGR over the next 10 years, I do not care how much money the manager makes, i will still wag my tail.

    Ps: I am a direct equity guy, and hate the direct tax code :). It favors a scheme instead of a direct investment.

  • cosmetic surgeon says:

    >Mutual fund is the best option for investment. so the above articles are very informative and helpful.