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Feb 28, 2013, 08.33 AM IST | Source: CNBC-TV18

Budget 2013: MF houses war over RGESS commission

The government proposed Rajiv Gandhi Equity Savings Scheme (RGESS) is creating a rift amongst mutual fund houses.

The government proposed Rajiv Gandhi Equity Savings Scheme (RGESS) is creating a rift amongst mutual fund houses.

With large fund houses handing out fatter commissions to distributors in order to draw in more investors. However, CNBC-TV18’s Mitra Joshi and Gopika Gopakumar reports that this is creating unhealthy competition in the market.

Also read: Budget 2013-14: Changes that will fuel investments & demand

In an effort to attract new investors and more funds to RGESS, big mutual fund houses are shelling out an accumulated, but steep 5-6% commission to distributors.

The economics of RGESS works as follows.

For RGESS, since t is a three year lock-in scheme and an investor will pay three times of 2.7 percent that comes to 8.1 per cent total expense ratio for three years.

However, the reality is that large mutual fund houses are actually paying an accumulative payment to a distributor for three years. So, out of 8.1%, an AMC is shelling upto 6% to a distributor. So an AMC gets 2% margin at the end of three years.

Surjit Mishra, EVP & National Head - Mutual Funds, Bajaj Capital says, the brokerage structure is comparable with Equity linked savings scheme (ELSS) structure which is 3 year front-ended. I don't think there is any access payout as it is made out to be.

However, this move has not gone down well with mid-sized and small fund houses who cannot afford to pay such high commissions and are therefore at a disadvantage when trying to launch these schemes.

Nilesh Sathe, CEO, LIC Nomura Mutual Fund says, if they are not able to stand in the competition, they will be wiped out. It is survival of the fittest. In competitive world, you cannot say that because I am small I should be protected.

At its end, mutual fund industry body The Association of Mutual Funds in India (AMFI) though insists there isn't anything wrong with the commission structure of RGESS but still more clarity is needed in order to stem the unhealthy competition rising between the mutual fund houses over this issue.

Q Expense Ratio is not of utmost importance for:

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