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SEBI data reveals that 27% of the money raised during NFOs came from switch transaction.
Of the total assets of Rs.85000 crore raised during NFOs of 86 schemes launched between April 2021 and September 2022, Rs.23,000 crore came from switch in transaction. Such an amount was Rs.1500 crore in the case of direct plans. SEBI said, “Switch transactions in regular plans amounted to INR 22,823 crores i.e. 93% of total switch transactions. No such pattern of switch was seen in case of investments through direct plans.”
In fact, in one of the schemes, n inflow through switch transaction was 55% of the total amount raised by the NFO, said SEBI.
However, the data does not reveal if such a switch transaction happened from liquid/overnight funds or other schemes.
SEBI attribute this to higher incentive to distributors in NFOs. “Owing to scheme level slab-based TER structure, a new scheme with small size of AUM is able to charge higher TER as compared to an existing scheme with higher AUM. Thus, AMCs can be motivated to give high distribution commission for new NFO schemes wherein it can charge high TER and nudge the switch transactions from existing schemes with large size AUM to the new schemes with smaller AUM size. Having higher distribution commission structures for NFOs as compared to existing schemes may induce some distributors to churn their investors’ portfolios or mis-sell investment products for higher commissions, which is not desirable.”
Another reason was higher trail commission in the initial years compared to subsequent years. SEBI said, “It is understood that the trail commissions paid by AMCs is often higher in the first /initial year(s) of inflows/investments and reduces in subsequent years. This practice of paying lower trail commissions after initial years of investments also encourages churning and/or mis-selling of products by distributors after the first year of investments.”
SEBI has proposed that that there will be no incentive on churning. If an MFD moves his client’s asset from scheme A to scheme B, he will either get the same commission structure or such a commission cannot exceed 25% of the committed structure for the first three years.
