Fund officials say that they are witnessing improvement in redemption patterns after introduction of ‘claw back’ rule.
The issue of excessive churning has been a cause of concern for AMCs for a long time now. To tackle this menace, AMFI had asked fund houses to ‘claw back’ commissions in case of quick redemptions.
The issue of churning is subjective in nature. One can’t ascertain easily whether the redemption was induced by the distributor to earn more commission or at investor request.
We spoke to industry stakeholders to ascertain whether there has been a general improvement in the sales practices of distributors after the implementation of ‘claw back’.
Fund officials say that with ‘claw back’ in place, churning has reduced considerably.
“We have seen a change in investors’ redemption pattern. The churning has reduced from bank distributors segment because it can affect their revenues,” said the sales head of a public sector fund house.
In case of equity funds, AMCs have to ‘claw back’ upfront commission if the money is redeemed before one year and three months for other scheme categories.
This ‘claw back’ can be also linked to the exit load period. For instance, if the exit load window is six months then any investment redeemed before six months can be clawed back. Generally, the exit load period in case of equity funds is one year and six months to three months in case of debt funds. Some AMCs spread out claw backs in order to help smaller IFAs.
D P Singh, Executive Director & Chief Marketing Officer (Domestic Business), SBI Mutual Fund says that while claw backs have helped, the industry the issue has not been tackled completely. “It has helped the industry. Earlier distributors were churning very frequently within a short period of time. It’s not an abuse anymore. However, the churning is still happening. Now that distributors are churning immediately after exit load period is over.”
Vinod Jain of Jain Investments too seconds the view. “It has brought down churning to some extent but has not eradicated the problem completely. The decision to switch or redeem depends on investor’s permission.”
Fund officials say that banks have become more cautious in selling third party products.
The amount which AMCs have to claw back is set off against future payments made to the distributor or refunded by way of a direct payment from the distributor to the AMC.
To monitor distributors who churn excessively, SEBI has tightened its regulatory oversight by asking AMCs to make additional disclosures pertaining to distributor-wise gross inflows, net inflows, average assets under management and ratio of AUM to gross inflows on their websites to identify portfolio turnovers.
AMCs are required to send a compliance report on a half-yearly basis to AMFI to show that they have complied with the rule.
Fund houses incentivize distributors as per the model chosen by distributors. Some distributors prefer to receive upfront commissions to recover their client acquisition cost while others prefer to receive only trail.
Lately, distributors have been transitioning to ‘all trail model’ to align with investor interests. Adopting an ‘all trail’ model is also advantageous to distributors. If there are ‘mark to market’ gains trail commissions goes up and vice-versa.
The industry has been trying various methods to reduce churning.
To tackle premature redemptions and inculcate a habit of staying long term, some fund houses have hiked their exit loads.
