Is the growth in mutual fund investments on the verge of a stagnation?

Manuj Joshi 15th February 2018

In the existing market structure, the mutual funds market has a plethora of people engaged in doing essentially the same work which is to bring more investors into the market. These people may call themselves Mutual Fund Distributors, Independent Financial Advisors, Financial Consultants or Investment Advisors. They not only sell the mutual funds to their clients but also advise them over which fund to buy. Their earnings come from two routes. One, charging a fee from their clients and two, commission received from mutual fund houses which can come in as either upfront commissions or trail commissions.

An upfront commission is paid on the sale of the mutual fund and trail commission is paid according to the period the customer chooses to hold the mutual fund.

This structure of commissions brings in anelement of bias in the advice given by the distributors.They usually push the clients for a fund that provides them with better upfront commissions.Once the investor finds that the fund is not performing as well as they expected, distributors convince them to invest in another fund. Since the trail commissions are usually lower than the upfront commissions offered, the distributors earn more from short term investments than from a long-term investment by their client.

SEBI has proposed a regulation to separate the mutual fund distributors from advisors. The aim of the regulator is to remove the conflict of interest which found its place due to the commission structure of the advisors/distributors.

Now with the new regulations the advisors will charge a fee for their advisory services without considering what commissions are being offered. They will not be allowed to sell any funds to the client. The MFDs (Mutual Fund Distributors) will be restricted to only describing what the ...

Note: Views expressed in this blog are those of the author.