Floundering mutual funds wooing distributors with expensive junkets   

February 25, 2010

Disenchanted investors are pulling money out of mutual funds, there is chaos over regulation of collective investment schemes and serious worry whether the mutual funds business is headed for stagnancy. What is the fund industry’s response? Do much more of the same. Unable to pay entry loads to distributors, asset management companies (AMCs) are blowing up money on flying distributors to expensive junkets.

According to industry sources, HDFC Mutual Fund is planning to take some 50-odd distributors to Italy on 17 March 2010 for four days. These are among the top distributors who have raked in maximum moolah for HDFC Mutual Fund. Recently, Reliance Mutual Fund took some of its distributors to Kashmir while HSBC took them to Kerala for a long weekend. According to distributors, Templeton has a scheme wherein any distributor who achieves his target is entitled to a foreign trip.

Funnily, the number of junkets have increased so much that they are becoming counter-productive. Some large distributors are sick and tired of such frequent fly-offs. According to sources, one of the frustrated distributors returned to Mumbai mid-way from his Kashmir junket.

The junkets have reached such unseemly proportions that KN Vaidyanathan, executive director of market regulator Securities and Exchange Board of India, has recently said that the regulator won’t tolerate such incentives.

The question is: Who pays for these fancy trips? So far, it was deducted from  investors’ money, but the regulator has now come down heavily on AMCs and is preventing the fund industry from making investors pay for such extravaganzas. So AMCs are supposed to be bearing the expenses on their own. “Earlier, AMCs were debiting the expenses of junkets to the schemes but now they have to pay out of their pockets,” says an industry source.

Lavishing money on distributors is not new, but assumes importance now in the light of the fact that money is moving out of funds after SEBI abolished entry loads. Some years back, it was quite the norm to incentivise distributors with expensive gifts and foreign trips, until SEBI cracked down heavily on these practices. This was akin to bribing the channel partners. Indeed, AMCs rarely sell their funds on the basis of performance; they depend on either lavish advertisements or on bribing distributors to push their products.

After the ban on entry load that came into play from 1 August 2009, outflow of money from fund schemes accelerated since most financial advisors had no incentive to sell and service funds. Between August 2009 and December 2009, when the Sensex gained 15%, the mutual fund industry saw a massive outflow of Rs7,315 crore. “So, now, AMCs are trying some other methods to hard-sell their schemes,” says an IFA.

This explains why AMCs have started resorting to expensive junkets again as a means to garner assets. “After coming back from these trips, distributors generally try to push that particular AMC’s product. Many a times, a product is sold to someone whose risk profile does not match the scheme at all,” says a certified financial planner.

Indeed, foreign junkets of AMCs and other incentives of fund companies, such as Templeton’s promised trip to Malaysia, are compromising the interests of retail investors. “Usually, the first 50 distributors who bring maximum AUM are taken to foreign locations like Italy, Hong Kong and Istanbul, and the next 50 are taken to Dubai. So, distributors are trying to get into the first 50 slot so that they can go to Italy,” said an IFA who did not wish to be named.

There is also a cynical interpretation of these junkets. According to the CEO of an AMC, it is fund executives who seem to be more keen on junketing. “They are having fun ever so often, in the name of wooing distributors. The serious distributors are not in this.” 

In remains to be seen whether irrespective of cumbersome rules and regulations and poor performance, the distributors, bribed by lavish junkets, would be able to push fund products down the throats of the investing public.

Interestingly, companies selling fixed deposits are also in the same game. “Most of the brokers are selling Mahindra Finance products today. If a broker gets Rs1 crore fixed deposit business, he or she gets a free trip to Malaysia. Everyone is getting tempted to go on a foreign trip,” said a distributor. — Ravi Samalad