In tightening the rules for fund houses to enhance disclosure, Sebi fulfils one regulatory dharma but hurts another: that of developing the mutual fund industry.
Sebi must ensure that it does not kill the distribution business and defeat the goal of making mutual funds a vehicle for mass investment.
Fee-based investor advice is ideal, but in India, distribution is key to spread the investing habit. Encourage competing fund houses to offer different distribution models to investors: the present one, in which costs are part of the overhead expenses, explicit fees and zero charges when investors buy online directly from a fund house.
The education arising from such competition is what will benefit investors. The new rules mandate the fund company to clearly mention the actual commission paid to distributors in the consolidated account statement that is given to the customer.
It should also show the expense ratio of both the regular and direct plans of a scheme that an investor is invested in. The new rules, as Dhirendra Kumar of Value Research argues, will create a situation wherein distributors bring in new customers but as soon as customers turn profitable, they switch to direct plans.
