Investing in mutual funds has important life lessons to teach.
Like this one: Who would you rather buy a mutual fund from? An adviser who will charge you for her expertise, but will help make better returns in the long term, or from a distributor who doesn’t charge you a dime upfront, but shares with you a part of the commission she earns?
This, in essence, captures the dilemma and the lack of awareness among mutual fund investors. And it has got the Securities and Exchange Board of India (Sebi) rolling up its sleeves to make the process investor-friendly. The regulator thinks it is best if you to go to investment advisers to buy mutual funds over distributors. Because Registered Investment Advisers (RIAs) are in a position to give unbiased advice, as they make money only when investors pay them for it.
On 2 January, in the third and latest in its series of recommendations on investment advisers, Sebi effectively made the advisory business unsustainable by creating an uneven playing field.
Sebi said that distributors and advisers must be two completely different entities, entirely unrelated to each other. But it left a crack open. While saying distributors must not advise, it said they could still explain the features of the products sold. And advisers believe this is as good as any advice.
These changes will trigger a shift in the business models of many financial institutions including banks like SBI, HDFC, ICICI, Kotak, which both distribute and advise on investments. They will have to choose one of the two models before March 2019. It is a no-brainer that most may end up picking distributorships as they earn hundreds of crores in commissions.
It is at this time that payments company Paytm has announced that it is setting up an investment arm called Paytm Money. It wants to be an adviser and let people buy mutual funds for free. The mutual funds industry has taken a long time to get to 15 million investors. And Paytm’s existing scale could shake up the industry one way or the other. But more on that later.
Both the distributor and advisory lobby are sending suggestions flying back to Sebi, but a source with some knowledge on the matter said this consultation paper is the last in the series of rules regulating how mutual funds should be sold. “The rules are more or less set in stone now and the question is about the deadline of when these rules will truly be applicable,” says the executive director of a mutual fund house.
That only means the advisers have it coming.
Not enough wind beneath the wings
Sebi’s push towards the advisory model began in 2012. It said every mutual fund house should have two types of plans for every scheme it launches.