How do you strike a good Mutual Fund deal?

ET 10/10/09

Gone are the days when you would call a mutual fund distributor home and invest in a mutual fund scheme of your choice and hand over your cheque for the investment.

Now, in addition to the cheque you write out for your investment, you will also have to write out a cheque for the distributor. The tricky part here is while you probably know how much you want to invest in a scheme, the payment to the distributor is something that will have to be negotiated.

With the abolition of the entry loads on mutual fund schemes, mutual fund distributors are expected to be remunerated by investors for the service they provide. This change is an outcome of the massive drop in the commissions that the distributors used to get due to the removal of entry loads.

The upfront commissions on the mutual fund products on equity side now range between 0.25% and 1% of the assets mobilised by the distributor, against 2% and 2.5% earlier. The shortfall, of course, will have to come from the investor’s end. Though there is a practice of paying trail commissions to distributors as the investors stay invested in a scheme. However, not many distributors have banked much on the trail in the past, and hence, it is absolutely normal if your distributor bills you separately.

To cut a better deal, you have to first understand various fee structures in the market. The first one is ‘volume-based no charge’ model. Here, the larger players in the mutual fund distribution business come in. Distributors such as Bajaj Capital, Bluechip Investments do not charge the mutual fund transactions, all thanks to the high volumes they place with mutual fund houses. The second business model is a pure fee-based business model. Here players such as ICICI Direct would charge you a fixed fee ‘per transaction’.

This fixed fee is expressed either in absolute terms, irrespective of the amount you invest or it may be a percentage of the amount invested subject to a minimum fee. ICICI Direct charges Rs 100 for a lumpsum investment in mutual funds done through their trading platforms.

The fee for SIP stands at Rs 30 or 1.5% of the investment amount, whichever is lower. However, here if you are one of the big clients, the transaction fee can be waived altogether. But a word of caution , get a clear definition of the word ‘big’ . For ICICI Direct, the threshold limit is Rs 8 lakh. In other words, while placing a new lumpsum order if the MF unit holdings’ value in an investor’s account, as per records, stand at Rs 8 lakh (as per the value at NAV), the system will levy no transaction charge on the said transaction.

There is a third option also available in the market. Here the distributor tells the investor how much upfront commission she is paid by the fund house and the remaining has to be paid by the investor. In other words, if a distributor is paid 0.25% commission from mutual funds, she may charge the investor around 2% of the amount invested. This is especially popular among private banks and financial planners.

The complexity goes up, when the same distributor comes out with multiple options for a fund investor. Bajaj Capital though charges nothing for transactions in mutual funds, if you need an advice on your mutual fund portfolio, you will have to subscribe to their advisory services. “We don’t charge our investors for transactions. But where they need our expert assistance to manage their mutual fund holdings , we have ‘paid offerings’ at their services,” says Bajaj Capital vice-chairman and managing director Rajiv Deep Bajaj.

If you know where to invest and can monitor your portfolio, you are free to opt for ‘transaction only’ mode. For those who need some expert support can go for ‘premium services’ where they get benefits such as scheme recommendations, view on new fund offer, portfolio alerts. “Though we are offering services at no charge, ultimately we will have to move to fee-based model. As the smaller players in this business exit, this process will catch speed,” says a senior officer with a large Mumbaibased mutual fund distributor. This may make the life tougher for small investors. The only solace they can expect is the time they get to re-invent some of their shopping skills in financial super markets.

As the smaller distributors find it difficult to sustain, investors have to find out how serious the distributor is about his business. Those who are willing to sustain in the long run, have started offering value-added services such as holistic financial planning, newsletters, portfolio approach to handle investments.

The emphasis on transaction is going down at the ‘boutique’ investment shops and the advisory role is taking over. ‘Career advisers’ as the industry jargon accommodates them, must be preferred over the advisers who are running the business as a part-time activity. The ‘focussed approach’ of the service provider is likely to help you in the longer run, though it may be bit pricy.

“Few distributors are charging a fee to transact in mutual funds, and mutual fund investors still can go to mutual funds directly and buy it at no charge. Those who are looking for advisors, should look for one with requisite skill sets such as certification in financial planning and should have a good track record of offering an unbiased advice, says Sardesai Finance CEO Veer Sardesai.

There are other parameters that investors must ponder over before they finalise the intermediary. One can consider ‘product offering’ of the distributor. It makes sense to approach single entity to shop multiple products such as equity broking, mutual funds, insurance, loans, company fixed deposits and small savings. This umbrella approach not only offers the distributors an edge over others, but also gives space to negotiate on charges to the investors. As you zero in on one entity, consolidate your portfolio with that entity by transferring your older holdings bought from other distributors. This may be a difficult task involving good amount of efforts.

The last and most important thing. Charges in most non-institutional distributors are not fixed. In most cases, the distributors are found willing to negotiate the fee on mutual fund transactions.

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