To bring transparency in expenses and reduce portfolio churning and misselling in mutual funds, Sebi on Monday asked asset management companies to adopt full trail model of commission in all schemes without payment of any upfront commission.
However, upfronting of trail commission will be allowed only in case of inflows through systematic investment plans (SIPs), the securities and exchange board of India (Sebi) said in a circular.
Besides, the regulator has issued a framework for transparency in TER (total expense ratio) for mutual fund (MF) schemes, limiting the additional incentives for B-30 cities based on inflows from retail investors and performance disclosure of the MF schemes.
Sebi said that all scheme related expenses including commission paid to distributors will have to be paid from the scheme only within the regulatory limits and not from the books of the asset management companies (AMC), its associate, sponsor, trustee or any other entity through any route.
“MFs/ AMCs shall adopt full trail model of commission in all schemes, without payment of any upfront commission or upfronting of any trail commission, directly or indirectly, in cash or kind, through sponsorships, or any other route,” Sebi said.
A trail-fee model benefits distributors if their clients stay invested in schemes for a longer period. At present, mutual funds pay distributors upfront commission as high as 2 per cent against the one per cent recommended by Amfi. With regard to inflows through SIPs into MF schemes, a carve out has been considered only for new investors to the MF industry.