Looking for ways to incentivize mutual fund (MF) distributors, Sebi is mulling to do away with sub-limits within the annual fees that asset management companies (AMCs) are allowed to charge from investors. Instead, the market regulator is weighing options of allowing a consolidated fee structure as per the limits already in place.

At present, fund houses are allowed to charge 2.5% annual fee for the first Rs 100 crore of equity assets they manage, and this comes down by 25 basis points (100 basis points = 1%) for every additional Rs 300 crore assets under management (AUM) with the lower limit capped at 1.75%. However, following Sebi's stand of not charging investors more in any case, the overall limit for annual charges or expenses would remain the same, Sebi sources said.

At present, the annual expenses that AMCs charge have sub-limits under different heads like fund management charges, custodian fees, marketing expenses, etc. For example, the limit for annual fund management fee is 1.25% for the first Rs 100 crore worth of equity AUM, and 1% for AUM above this limit. The market regulator is now evaluating options of doing away with all these sub-limits to settle for a consolidated fee structure as per the limits already in place, Sebi sources said.

Top MF industry officials too said that they have been sounded out unofficially about such a move by the regulator but a final decision will be taken only after a detailed discussion within the Sebi board and industry players.

A change in the remuneration structure for MF distributors looks necessary since sales of fund units have dropped drastically after Sebi had banned entry load for mutual fund investments from August 2009. Subsequently, a large number of MF distributors, also called Independent Financial Advisors (IFAs), nearly stopped selling MF schemes, affecting the industry's growth. A few months ago, Sebi chairman U K Sinha had expressed concern about this trend. Although he had ruled out bringing back entry loads, he said the regulator needs to look at how the AMCs could remunerate MF distributors without additionally burdening the investors.

While fund houses say this is a welcome move, but this also raises the scope for bigger funds to pay higher distribution fees to get more AUM. For example, a fund house with say Rs 30,000 crore worth of equity AUM can afford to charge just 0.50% as fund management fee but still pay higher distribution charges to get more investor money than other fund houses which are forced to allot say 0.75% as fund management charge, head of a local fund house explained.

Another way of incentivizing MF distributors that the market participants are talking about is to increase annual expenses but, at the same time, include broking fees within it. At present, broking charges are accounted for as total cost of buying assets. For example, if a stock is bought at Rs 100 per share and the fund house pays 5 paise per share as broking commission, for the fund house the cost of buying this stock is taken as Rs 100.05. Although ultimately investors pay for the brokerage, it is not accounted for within the annual expenses. A fund house officials said this is a better option to change to because this would lead to less portfolio churning by fund houses and fund managers. On the other hand, brokers believe this will further dent their broking commissions from domestic fund houses.