It’s a quantum shift. Quantum Asset Management Co. Ltd (Quantum) prided itself as being India’s first and only direct to customer mutual fund. It did not pay any commissions to distributors, even if they went ahead and sold Quantum’s mutual fund schemes.
After more than a decade of sticking to this strategy, the fund house will now start paying commissions to distributors. It will launch a ‘regular’ plan in all its schemes. Every mutual fund scheme has a ‘regular’ plan and a ‘direct’ plan. Distributors earn a commission by selling regular plans. In direct plans, investors don’t pay distributor commissions.
On 7 February, Quantum announced it is launching regular plans. The fund house is already in talks with its panel of 300 distributors who sell Quantum’s schemes though they don’t get any commission, for now. “Additionally, we have also started to reach out to all other distributors and registered investment advisers as well,” confirmed Jimmy Patel, chief executive officer, Quantum.
Earlier this month, the fund house had also announced plans for lowering its overall expense ratio—specifying how much it would charge across all its schemes as they grow larger.
According to an email sent to investors, titled ‘An Inflection Point in Quantum’s Journey’, the fund house’s schemes will pay trail fees of 0.15% in the first year, 0.20% in the second, 0.25% in the third and 0.15% from the fourth year onwards. While this is much less than the industry standards, it is a huge shift in Quantum’s zero-commissions policy.
“The aim is not to make distributors rich, but to compensate them fairly for their advice and for the expenses that they may bear,” the fund house’s email stated.
Launched in 2006, at a time when commissions paid to distributors had hit the roof, Quantum had no big bank or company behind it. Yet, it entered a crowded mutual fund street, that was already in the midst of a raging bull market, and said that it won’t pay commissions to distributors. This was unheard of, especially when entry loads were still the norm. This was the 2.25% commission that mutual funds could charge their investors at the time of investing, and pass it on to distributors as their commission. These charges were abolished in 2009.
Quantum’s founder and director Ajit Dayal has always been vocal about the level of commissions earned by distributors. Typically, if the expense ratio of an equity fund is 2%, a good fund gives around 70% of it (1.4%) as commission to distributors, either as a combination of upfront and trail fees or just trail fees. These days, many distributors are shifting to an all-trail model and Quantum, too, will pay only trail fees to the distributors.
Why the Quantum leap
Distributors feel that Quantum has finally realized their importance. “Distributors play a vital role in ensuring that mutual funds reach the masses and not get restricted to just metros and the digital medium,” said Amol Joshi, founder, PlanRupee Investment Services. “It is not easy to sell mutual funds directly to investors. It is expensive. Quantum’s latest move is commercial and it seems to have realised that to grow, it needs distributors,” said Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd.
But the fund house has another take on this move. “We have always believed that distributors should be compensated for their efforts, subject to disclosures,” said Patel.
In a 2011 interview that Dayal gave to Mint he had said, “We believe everyone deserves to earn money. We support Securities and Exchange Board of India’s (Sebi) decision that distributors are supposed to get commission from investors and not from fund houses. But as many investors aren’t paying, agents get their commissions from fund houses. But they should be transparent and reveal the complete commissions earned from the fund houses to all their investors upfront, and not just when asked.” (Read it here: bit.ly/2ksyT3A.)
Dayal had also said that although Sebi had asked distributors to disclose the commissions, most were not doing so in a comprehendible manner. In 2016, Sebi mandated fund houses to disclose commissions given to distributors in investors’ account statements. With full commission disclosures now underway, Quantum says it will pay distributors who sell the ‘regular’ plans to investors.
The existing (and till date its only) plan will be rechristened as a ‘direct plan’ and will not pay distributor commissions.
However, Quantum’s decision may be too little, too late. It may have paid a heavy price for avoiding distributors, given that even after 10 years, Quantum Long Term Equity Fund’s size is still just Rs627.78 crore. Besides, every mutual fund scheme now has a direct plan, as per Sebi’s mandate.
“Their unique selling proposition (of being India’s only direct to customer mutual fund house) is gone. They would have realized by now that mutual funds are not something that investors would buy on their own. Investors need handholding and guidance, which the distributors can provide,” said another distributor, who did not wish to be named.
But that doesn’t deter Patel, even though he says that the feedback from distributors so far is that the commission is much lower than what other fund houses pay.
