Mumbai: It’s a quantum shift.
Over 10 years after Quantum Asset Management Co Ltd, which prided itself as being India’s first and only direct to customer mutual fund (that did not pay any commissions to distributors, even if they sold Quantum’s mutual fund schemes), entered the Indian mutual funds industry, it will start paying commissions to distributors.
It will launch a “regular” plan in all its schemes. Every mutual fund scheme has a ‘regular’ plan and a ‘direct’ plan. While distributors earn a commission by selling regular plans, investors who wish to bypass their distributors, invest through direct plans.
In a communication that it sent to its investors on 7 February, it announced its plans to launch regular plans. The fund house will begin speaking to distributors starting 13 February. Its chief executive officer, Jimmy Patel, was not available for comment and another senior fund official refused to comment, citing pending distributor talks. This comes close on the heels of the fund house announcing a road-map for lowering its overall expense ratio last week where it committed to charging lesser (it specified how much expenses it would actually charge, across all its schemes) as the schemes grow larger.
According to the latest email titled ‘An Inflection Point in Quantum’s Journey’, Quantum’s mutual fund schemes will pay trail fees of 0.15% in the first year, 0.20% in year#2, 0.25% in year#3 and 0.15% from year#4 onwards. Trail fees are paid to the distributor for as long as investors stay invested in the fund. This is still much less as compared to the industry’s standards, but even so is a huge shift in the fund house’s policy of paying zero commissions. “In keeping with our philosophy of being a low-cost fund, the commission structures proposed here are amongst the lowest in the industry, if not the lowest. The aim is not to make distributors rich, but to compensate them fairly for their advice and for the expenses which they may bear”, says the email.
Launched in 2006, at a time when commissions that fund houses paid to distributors hit the roof, Quantum Asset Management, which was a rank outsider with no big bank or company as its sponsor, entered a crowded mutual fund street that was already in the midst of a raging bull market and said that it won’t pay commissions to distributors. That was unheard of, especially since entry loads (abolished in 2009; the 2.25% commission that mutual funds were allowed to charge investors at the time of investing and pass on to distributors as their commission) were still the norm. Its founder and director Ajit Dayal has always been vociferous about the level of commissions that mutual fund distributors have earned over the years. Typically, equity funds used to pay about 1.75% as upfront fees to distributors (this got capped to 1% in 2015) and about 0.50-0.75% as trail fees. Debt funds usually pay less.
Distributors feel that the fund house has finally realised their importance. “Distributors play a vital role in ensuring that mutual funds reach out to masses and not just get restricted to metro towns and the digital medium”, says Amol Joshi, founder, PlanRupee Investment Services. “It is not easy to sell mutual funds directly to investors. It is expensive. Quantum’s latest move is commercial and they seem to have realised that to grow, they need distributors”, adds Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd.
The fund house doesn’t quite agree, as per the email. It says that while it has had “no problems with the distribution model”, it was against the quality of disclosures. In a 2011 interview that Dayal gave to Mint he had said “We believe everyone deserves to earn money. We support Sebi’s decision that distributors are supposed to get commission from investors and not from fund houses. But since many investors aren’t paying, agents get their commission from fund houses. But they should be transparent and reveal complete commission earned from fund houses to all their investors upfront, and not just when asked.
Dayal said that although the capital market regulator, Securities and Exchange Board of India (Sebi) had asked distributors to disclose the commissions, most distributors weren’t disclosing them in a comprehendible manner. In 2016, Sebi mandated fund houses to disclose the distributor’s commission in investors’ account statements. With full commission disclosures now getting underway, Quantum Asset Management says it will now pay distributors who sell the ‘regular’ plan to investors. The existing (and till date the only) plan will be re-christened the direct plan and will continue to avoid paying distributor commissions.
Quantum Asset Management’s decision may be too little, too late. The cost of avoiding the distributors was a bit much given that even after 10 years, QLTEF’s size is still, just Rs.627.78 crore. Besides, every scheme now has a direct plan, as per Sebi’s mandate. “Their unique selling proposition (India’s only direct to customer mutual fund house) is gone. They would have realised by now that mutual fund is not something that investors would buy on their own; they need handholding and guidance that distributors can provide”, says another distributor, who did not wish to be quoted