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New SEBI fee structure raises
October, 29th 2009

The new fee structure for mutual fund distributors has fund houses focussing again on businesses that were earlier considered unviable or worthless. Barely a few months ago, fund houses considered their portfolio management services (PMS) business a white elephant, as competition in the segment prevented them from attaining the scale they desired.

But now, with SEBI scrapping entry load on mutual fund schemes and the resultant lull in equity scheme sales, asset management companies (AMCs) have begun redrawing their business plans around PMS, which cater to wealthy investors. This is mainly because AMCs have the freedom to fix fees and commission that suit the growth of their PMS businesses.
Reliance Mutual, ICICI Prudential Asset Management, Tata Mutual Fund, Birla Sunlife MF and HDFC MF are believed to be attempting to boost their PMS business. The revival in broader markets is aiding fund houses to make a pitch to potential investors, according to PMS providers.

"With markets improving steadily, investors have become more confident about their investments. The whole idea of wealth management is gaining ground among investors," said Amish Munshi, head-PMS, Tata Mutual Fund. The renewed interest in PMS products nowadays is in stark contrast to the period in 2008, when service providers struggled to convince new clients to put in money and existing clients to stay invested due to the market crash.

Early in 2009, DSP BlackRock Investment Managers wound up its domestic PMS business, while Franklin Templeton is reported to have closed down select products. Industry officials said many other mutual funds considered PMS as secondary business till the SEBIs move in August to scrap the entry load of 2.25%.

The move deprived distributors of the commission from mutual funds, resulting in them selling more of insurance products and fixed deposits. Starting August, equity scheme sales have nearly halved in three months time. As per AMFI data, sales of equity schemes have come down to Rs 3,363 crore in September, logging a 15% fall from August.

"From a pure marketing point of view, promoting PMS products make more sense to relationship managers, as it gives them higher performance credits than selling mutual funds. PMS has become the core focus of many fund houses. Customised investment products are now being aggressively sold to investors," said Akhilesh Singh, business head, wealth management, Emkay Global Financial Services.

The mode of remunerating fund managers has changed from performance-linked management fee to fixed annual fees in the case of most fund houses. Fund management charges are levied in the range of 2.25 and 3% (of corpus), irrespective of loss or gain in portfolio at the end of term.

A few smaller fund houses are also following the old performance-linked management fee where investors share percentage of profits (generated on the portfolio) with the fund manager, apart from a small flat fee (1-1.5%). Distributors remunerations are in the range of 0.75 and 1.50% of fund management charges levied from investors.

While conventional wealth management companies and broking firms have raised their minimum investment limits to about Rs 50 lakh to Rs 1 crore, PMS schemes run by mutual funds firms have much lower entry levels with many starting at Rs 10 lakh.

According to wealth managers, it takes an investment of at least Rs 20 lakh to have a decent portfolio. At current market levels, such portfolios will have an array of mid-cap stocks, derivative instruments and a few large-cap stocks.

"Getting investors into these schemes is still a very hard task for most fund houses. People who have lost money investing into PMS schemes in 2008 are not willing to put money anymore. PMS schemes based on structured notes, however, are witnessing some interest from savvy investors," said the CEO of large fund house.

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