Sebi brings in more transparency to mutual fund investment
The market regulator, Sebi, which had earlier stated its intention of scraping the upfront commission, has finally brought in the circular that has banned upfront commission in mutual funds with immediate effect (October 22, 2018). This is being done by the regulator with the intention of bringing in more transparency to mutual fund investment. This will also help in bringing in down the churning and mis-selling of mutual fund schemes.
Fund houses need to adopt a full trail model of commission in all schemes, without payment of any upfront commission or upfronting of any trail commission. Moreover, such commission should be paid out of scheme only and not from the books of asset management companies (AMC).
Nonetheless, upfronting of the trail commission is allowed in case of inflows through Systematic Investment Plan (SIP). However, there are certain conditions that need to be fulfilled. It is applicable only for new investors of the mutual fund industry. Fund houses can pay 1 per cent upfronting on SIP of up to Rs. 5,000 for a maximum period of three years.
Furthermore, the additional commission for B30 cities shall be paid as trail only. This can be charged upto 30 basis points on daily net assets of the scheme based on inflows from beyond top 30 cities (B30 cities). It has been further decided that the additional expense ratio can be charged based on inflows only from retail investors from B30 cities.
Besides, Sebi has also come out with other directives that will help investors to evaluate the performance of the funds. AMCs shall disclose the performance of all schemes on the website of AMFI. It should disclose for all schemes, the scheme returns vis-à-vis the benchmark return (Total Return Index) along with the CAGR for various periods viz. 1-year, 3-year, 5-year, 10-year and since inception. It should be updated daily based on the previous day's NAV. The disclosure should include other important fields such as scheme AUM and the previous day's NAV.