Your MF distributor is still making money

Jul 11, 2012

In this issue:
» The fastest growing economy over next 5 years
» Small investors in Spain will see their savings vanish!
» Will Iran sell oil for less?
» China's credit system worse than Spain, Greece
» ...and more!


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00:00
 
Indian households invest less than 5% of their surplus in equities and mutual funds. But their banks and brokers often insist on putting in more. After all the more they buy, the higher is commission pocketed by the mutual fund distributors. Thus equity buying habit of Indians is driven by the persuasion of commission driven brokers, or so it seems. Instead they should be driven by attractiveness and long term scope of equities as an asset class. But Indian households would rather wait for the nudge from their bankers and brokers. At least this is the logic that has driven the SEBI to re-consider entry loads for equity mutual funds.

Ever since the entry loads in Indian mutual fund industry were banned, AMCs have witnessed their assets under management dry up. The exit of a large MNC player was also seen as sign of distress in the times to come. It was argued that with the disinterest on the part of distributors, it would be difficult for the industry to survive. Lack of commissions was therefore seen as the biggest hurdle to the growth of capital markets in India.

However, it seems that the mutual fund regulator's opinions are quite misplaced. For, it is true that many mutual funds are not really making money for their investors. Most have failed to outperform the benchmark indices. Many mutual funds too may not be making money with the constant exit of investor money. But the distributors are a shrewd lot. They are still making loads of money, even in these difficult times. Data compiled by a business daily from AMFI shows that MF distributor commissions are up by as much as 50% YoY for some leading players. For the top 10 distributors, overall commissions are up by around 5%. This is when the assets under management (AUM) have dropped by 5%. Thus the assumption that distributors do not make money when AUMs are lower could not be further from the truth. Many argue that the higher commissions have mainly come from fixed income schemes. But the fact that commissions on fixed income schemes are lower than equities makes the case for the latter stronger. Higher volume in debt instruments seems to have fetched substantially higher commissions. But if that is the case, imagine the impact that higher investor interest in equities can have.

Instead of rallying around their distributors, all fund houses need to do is to reach out to more investors directly. This will not just save their commission but also ensure substantial accrual to their AUMs. Meanwhile, the SEBI would do well to educate investors about the benefits of investing in equities. Ceding to distributor demands for higher commissions is unlikely to take Indian capital markets to the next level.

Do you think that SEBI should once again allow entry loads for mutual funds? Let us know your comments or post them on our Facebook page / Google+ page.

01:20
 Chart of the day
 
The West seems to be stuck in a vicious cycle of joblessness and lower economic growth. Even emerging economies like China and India are showing signs of dramatic slowdown. At such times, it is interesting to know, which economy will spearhead the GDP growth in times to come. As per the International Monetary Fund (IMF), Iraq will top the economies with the fastest GDP growth rate in 4 out of the next 5 years. Worth pointing that the economy of Iraq is expected to grow by as much as 12.6% in 2012 and at an average rate of 9.6% over the next 5 years.

Source: IMF

01:45
 
The biggest problem with the financial crisis was the fact that people who were innocent were forced to pick the tab for those who committed serious blunders. In other words, while the profits were privatised, there was a mass socialization of losses. That nothing has changed was on display yet again at the recent bailout of Spain's banks. As per reports, bailout for Spanish banks will happen only under the condition that they fully write off their preferred shares and subordinated bonds. As per estimates, there is Euro 67 bn worth of such instruments outstanding. Any guesses who is the holder of these instruments? Well, it is none other than retail investors. Thus, small investors in Spain are on track to see their hard earned savings worth few billion Euros disappear in thin air. And for very little fault of theirs. Saddening, isn't it? Even more saddening is the fact that policymakers seemed to have learned nothing from such events and continue with their lax regulations and oversight.

02:15
 
In the standoff between US and Iran over Iranian nuclear programme, it looks like US will take the lead. The sanctions on Iran have led to a drastic cut down in oil exports from Iran. The latter for whom oil exports are they key economic growth driver is struggling really hard. Iran is not in a position to adjust or cut down oil production in response to a slowdown in exports. This is because the process is complicated and could impact the potential to produce in the future. To deal with the situation, Iran is using its storage capacity. But that obviously is bound to run out in sometime. And then Iran might be forced to sell its oil in black market at much lesser prices. Whether the sanctions are justified or not is a different issue. The fact they have been imposed at a time when the oil demand is softening has made things more painful for Iran than the oil market.

02:49
 
Amongst the many factors that have been talked about for the slowing Indian economy are infrastructure bottlenecks. A lot has been written about the impact of such factors on the industrial and mining sectors towards the overall Indian GDP which clocked a growth of 6.5% in FY12 as against 8.4% in the previous two financial years. A leading business daily has discussed the same by taking examples of NMDC and Coal India - two of the largest mining companies in India supplying basic raw material requirements for most of the industrial activity. Despite having adequate funds and approved outlays and expenditure plans, these companies were not able to deploy funds available to them. The companies blame delayed clearances & logistical issues from the government's side for the same. To put things in perspective, NMDC had an approved outlay of Rs 71.5 bn for the Eleventh five year plan. However, the company only managed to spend 43% of the total planned outlay. CIL in the year FY12 spent only Rs 27.6 bn (till February 2012) as against the planned sum of Rs 42.2 bn.

We believe that at the end of the day, the big question in the minds of investors would be 'which way will the Indian GDP go? ' Our founder, Ajit Dayal is of the view that the chances of the Indian economy falling to the 6.5% figure are low, provided the government remains focused and does not take any unnecessary decisions. Catch Ajit talk about his views on the Indian economy and much more at the recently concluded Equitymaster Web Summit.

03:20
 
The Reserve Bank of India (RBI) in 2010 had come out with certain guidelines with respect to giving out banking licenses to companies. The draft guidelines required promoter groups to have diversified ownership, sound credentials and integrity with a successful track record of at least 10 years. Besides this the listing period was set at 2 years with the promoters diluting stake to 40% in this time period. India Inc. has now given its feedback on some of these guidelines. While most have no problems with these guidelines per se, the wishlist appears to be more for extending timelines for certain things. For instance, many consider the listing time of 2 years too ambitious and want this to be extended to 3 to 5 years. The process of dilution should also be staggered over more years than the suggested 2 years is what many of these companies feel. Most also opine that the requirement for a new private bank to have 25% of its branches in unbanked rural centres is quite cumbersome. They want this to be lowered to 15% to ensure a level-playing field.

Banking in India is regulated and very rightly so. Most top banks in the developed world were brought to their knees in the financial crisis due to shoddy regulation and unhealthy practices by bankers. India emerged unscathed largely due to the strict vigilance of the RBI. Hence, companies may come out with wishlists for new banking licenses. The RBI needs to stick to its principle of doling out licenses based on the welfare of the overall banking sector.

04:05
 
China has exhibited signs of a slowdown in recent times. The slowdown has been attributed to lack of reforms. Post the economic stimulus doled out by its government in 2009, the politicians pretty much kept themselves busy trying to reign in the property bubble that built up in the years to come. As a result, they either chose to or actually forgot to come up with reforms. Reforms that would spearhead the economy in its next phase of growth. But if one were to dig deeper the problem in China seems to extend beyond reforms. The health of the credit system in China is dismal. As per leading hedge fund manager, Jim Chanos, the credit situation in China is even worse than that of Spain and Greece. Bad loans, irrecoverable receivables, are just some factors that are plaguing the financial system in the country. If things were to continue in this direction, the country would soon be looking at a crisis.

04:35
 
After starting out close to the dotted line, the indices in Indian stock markets nosedived into the negative territory as selling pressure intensified in the software, commodity and auto sectors. At the time of writing, the BSE Sensex was trading 105 points below the dotted line. The indices in most other Asian markets closed marginally higher in today's trade. Those in Europe have also opened in the positive.

04:50
 Today's investing mantra
"In any business, there are going to be all kinds of factors that happen next week, next month, next year, and so forth. But the really important thing is to be in the right business." - Warren Buffett

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    17 Responses to "Your MF distributor is still making money"

    Abhinav Prabhudan

    Aug 4, 2012

    and because of all this, the people that most suffer are the honest distributors who really try to create value for their clients. this article has generalised that all distributors are like fraudulent in their approach. every distributor is still making money. wow. thanks for enlightenment.

    Like (3)

    Ashit Kothi

    Jul 12, 2012

    NO LUNCH IS FREE, YET WE ALL WANT FREE LUNCH.

    WHILE WE WANT FINANCIAL ADVISOR TO ADVISE US, WE DO NOT WANT TO PAY FOR THE SAME. ON FINANCIAL ADVISOR'S(FA) PART, THEY WANT TO MAKE QUICK BUCK AND NOT BOTHER ABOUT BUILDING LONG LASTING RELATIONSHIP. WHY ? BECAUSE, FA DOES NOT KNOW AS TO WHEN THE CLIENT WILL MOVE TO THE BAIT OF ANOTHER FA.

    AS FOR YOUR ARTICLE, YOU HAVE JUST MENTIONED MF Distributors are still making money. NAME THEM - ARE THEY INDIVIDUAL FINANCIAL ADVISOR ? CORPORATE BROKING HOUSE ? BANKS SELLING MUTUAL FUND PRODUCTS ? WHO ARE THE TOP 10 MF DISTRIBUTORS ?

    DOES GENERALISING A SITUATION GIVES A RIGHT PICTURE ?

    LOOK AT ALL THE COMMENTS MADE BY OTHERS IN LAST FEW DAYS ON THIS SUBJECT. TRUTH LIES SOMEWHERE INBETWEEN. WE ALL DO NOT WANT TO SEE THE TRUTH. - AGAIN I AM ALSO GENERALISING HERE.

    Like (3)

    Albert

    Jul 12, 2012

    Why should we pay an entry load if no distributor is involved? The greedy AMC's always want more. They are not happy with the 1.5 - 2.5% management fees being charged.

    Like (3)

    Nitin Sanzgiri

    Jul 12, 2012

    I entirely endorse Mr. Prasad's view.

    Like (3)

    S.S.Ranganathan

    Jul 12, 2012

    Since the MF distributors are still making money,while investors most often lose money for having trusted the advice of distributor.I would not like to see the re-entry of entry load that has been banned,under any circumstances.I am in fact counting on the SEBI to protect the investors.

    Like (3)

    Abhay Amrite

    Jul 12, 2012

    I find the views very narrow. All distributors/dealers of any model of car make more money collectively than the manufacturer of the car, The middle men or distributors of our day to day Food items make more money that the poor farmer. It is there in every aspect of our life, why is it that the financial industry been single out.

    Yes there are issues of high churn/ selling products where commissions are high etc.... and the regulators need to address issues as to how to provide correct advise rather than the sole criteria being money being made by distributors. Also it is for all investors to ponder as to why they do invest through an agent when there is an option to go directly to AMCs / why rate an distributor/advisor good based on innovative products being offered by him rather than innovative strategy to counter market cycles. Also many investors do not give any importance to investments before they are being invested, but when the investment goes bad they spend 10 times more time later. Would request each investor to spend more time in understanding before investing. I have a lot to write and would contribute to the column later.

    Like (4)

    PM Menon

    Jul 12, 2012

    UNLESS THE FINE PRINT IS BANNED AND EVERYTHING IS IN BOLD AND CLEAR THIS TYPE OF LEECHING THE INVESTOR WILL CONTINUE. I DO AGREE THAT MF HOUSES AND DISTRIBUTORS ETC ARE DOING A BUSINESS AND SHOULD MAKE MONEY BUT ONLY IF THE ENTIRE HIDDEN ISSUES ARE OUT IN THE OPEN AND MADE CLEAR. IF AN INVESTOR IS MADE FULLY AWARE IN SIMPLE TERMS ON WHAT ARE THE EXPENSES THAT WOULD BE DEDUCTED FROM HIS INVESTMENT EG MF FEES INITIALLY AND SUBSEQUENTLY FOR ANY AND ALL REASONS , DEDUCTIONS /FEES TO AGENTS/DISTRIBUTORS AND A NETT INVESTMENT CHART IS PROVIDED, THE ONE KNOW HOW MUCH OF THE INVESTMENT GOES AS NON RETURNABLE, RIGHT THRU THE LIFE OF THE INVESTMENT. EVEN COMMISSION'S FEES PAYABLE TO AGENTS WHICH I BELIEVE IS NEVER SHOWN BUT LEECHED OFF EVERY YEAR IRRESPECTIVE OF THE FACT THAT ONE NEVER SEES THE AGENT OR TAKES NAY SERVICE FROM HIM ( JUST BECAUSE HE HAD HIS RUBBER STAMP ON THE APPLICATION FORM!!) IS BROUGHT ABOVE BOARD, THE INVESTOR IS PROTECTED AGAINST HIDDEN ""FRAUD"". ONE WILL NOT REGRET ANY OF THESE AGENCIES MAKING A FAIR, OPENLY DECLARED PROFIT/INCOME. THE HIDDEN ONES ARE THE DEVIL.

    Like (4)

    Kaushik G

    Jul 11, 2012

    India is a land for lobbyists. The more the lobbying the better the chances for favourable legislation. It is unfortunate that, Mutual Fund distributors, supposedly the educated and learned lot, have to take up lobbying not for a better and a healthy market making, but for their own pockets. Without taking much efforts, they want to make more money. The amount of commissions are so huge, I am sure the regulator would not even need 20-25% of this amount, to impart appropriate education to the people in general, through various channels available today. Hope top bosses at SEBI are able to get it right this time, by not allowing the undeserving commissions to re-enter.

    Like (3)

    subhash c puri

    Jul 11, 2012

    there is no free lunch if sebi wants distributors to do their job right they must get reward for the work they do .

    Like (3)

    S.R. Jagganmohan

    Jul 11, 2012

    The abolition of entry load was and is the right step.

    The Fund House is accountable for performance of the fund and for marketing the fund direct to investors.

    White goods and auto sector houses direct their messages in a practical way to the consumer. Such a practical approach to investors by the fund houses should help. How the fund meets the risk-reward profile is the selling point. What are the rewards is the selling point. Fund houses should use these ideas in a factual, practical and consistent message to investors. This will increase the AUM just as the Insurance premiums in the last ten years.

    Like (3)
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