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| Capitalstars Investment Advisor |
As per SEBI data, as of 31st March 20118, there were 107,302 mutual fund distributors in India. The vast majority of mutual fund ‘advisors’ in India are actually distributors of mutual funds. This includes relationship managers in banks. They are paid on a commission basis by the fund houses and not by the customers. In case you are unsure who your distributor is, you can identify him from the AMFI Registration Number (ARN) that will be mentioned on your mutual fund statement. A mutual fund distributor is distinct from a SEBI Registered Financial Advisor (RIA) who cannot collect commissions and must instead directly charge you for financial advice. SEBI created this new intermediary in 2013 in order to reduce conflicts of interest and bias in financial advice. However, only 1,136 RIAs were registered in India as of 31st March 2018.
According to Kalpesh Ashar, Founder, Full Circle Financial Planners, and Advisors, a mutual distributor must fulfill three essential duties. “First, a good distributor will take time to understand your overall asset allocation, your financial goals, and your risk appetite.
Second, he will explain clearly the risks involved in mutual fund investing. Third, he will not churn your portfolio in the pursuit of higher commissions," he said. However if your distributor is not fulfilling these duties, your options are limited.
What can you do?
As an investor, you can change your mutual fund distributor simply by filing a form to that effect. You can obtain this form from AMC websites. However, in this case, the new agent does not get any trail commissions on all your current investments and has very little incentive to service you. “The new distributor will not get a commission on the existing investments. However he or she will get commissions on fresh investments made by the client," said Viral Bhatt, a Mumbai based mutual fund distributor. However, as a proportion of your overall mutual fund portfolio, your fresh investments may be a small part.
You can also switch out of regular plans and move to direct plans but this can attract exit load and tax. Exit load in equity funds is usually levied for periods up to 1 year from the purchase date while the time period ranges from a few weeks to a few months for most categories of debt funds. In addition, you may face a tax liability on the capital gains you have made in the fund. In the case of equity funds, this is 15% for redemptions within a year of purchase and 10% thereafter. In the case of debt funds, this is at the slab rate for redemptions within 3 years of purchase and 20% with indexation thereafter.
The costly switching structure means that you must be extremely careful while selecting your distributor in the first place. Check that the distributor has a good track record and the ability to provide you with high-quality fund research and execution services.
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