Last week, the markets regulator made a number of significant regulatory changes that will have a deep impact on the way mutual funds are sold. It's quite likely that these changes will eventually drive small, independent fund distributors out of business.
Even though this is not the goal (at least, it's not the stated goal) of these changes, these regulations will make the operating environment even more distinctly hostile to such businesses.
By elimination, they will work to the advantage of larger, corporate entities like banks. The big change that the Securities and Exchange Board of India (Sebi) has made is that the commission paid by the fund company to a distributor will be clearly mentioned in the account statement that the customer will get.
Not just that, the account statement will also mention the expense ratio of both the regular and the direct plans of the scheme that the investor has invested in. The regular plan of a scheme is the one sold by distributors, while the direct plan is sold directly by the fund company to the investor.
The two have identical underlying investments, but since fund companies' expenses are lower in direct plan (they don't have to pay commissions), the returns to the investors are somewhat higher. In effect, Sebi has turned the customer's account statement into a marketing pitch for switching from regular funds to direct funds. The statement will effectively say to the customer: "Look here, your distributor is taking away this much commission from your money.
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