SEBI may Stop Mutual Fund Distributors’ Incentives in 15 Small Cities

Swetha Dhinesh

21 Mar, 2023

By changing the definition of B30 (beyond the top 30) cities to B45, market regulator SEBI intends to reduce the incentives offered to distributors for mutual funds. Whenever SEBI officially publishes its decision, the additional incentive of 0.30 per cent granted to Mutual Fund distributors for obtaining contributions of up to ₹ 2 lakhs into mutual funds from 15 minor cities will be terminated.

The B30 incentive, which was fixed over five years ago, is currently being reviewed to determine its influence on MF penetration. The SEBI wants the incentive to be eliminated for cities that have reached fund flow maturity in recent years due to the favourable response and rising capital flow into B30 cities. And this incentive was offered only for fund flows from B45.

What is the additional benefit?

SEBI rules^[1] say that retail investors are those who invest up to Rs. 2 lakhs per transaction. It has been decided inflows of amounts up to Rs. 2 lakhs per transaction by individual investors shall be considered inflows from retail investors. Also, AMC can charge additional 30 bps applicable on B30 cities only from retail investors. In simple, one can get additional benefits only if the assets in B30 cities come from retail investors. 

Mutual Fund Distributor

A mutual fund distributor assists investors in India with the purchase and sale of mutual funds. By attracting investors to the mutual fund scheme, the distributors of mutual funds are compensated. Additionally, they offer investors advice regarding the various plans offered by various mutual fund houses. 

Every mutual fund is registered with SEBI (Securities and Exchange Board of India) and is consequently considered to be safe. The distributors of mutual funds also assist investors in executing investment transactions. Investments, switching between mutual funds, and redemption fall within this category. They also provide the investors with monthly advice regarding the success of their investment.

A mutual fund agent is another name for the distributor of mutual funds. The mutual fund agent must monitor the operation and performance of the mutual fund industries. Additionally, this kind of mutual fund agent must regularly monitor fund information and carry out qualitative and quantitative analysis using databases. Also, they must monitor critical changes in the economy, markets, and mutual fund sector.

Also, the mutual fund distributors occasionally work in coordination and collaboration with the mutual fund companies. The many investment alternatives for their investors will be more accessible with their help. Additionally, this enables them to build a database of fund suggestions and findings.

SEBI’s observation in distributor’s incentives

Recently, the B30 incentive was halted because SEBI discovered that distributors were dividing large investments into two lakhs in order to take advantage of the additional incentive. In order to receive greater incentives, distributors have been observed by the regulator churning existing investments from B30 cities.

• While having several applications may worry the regulator, distributors should be given the benefit of the doubt because they may be trying to safeguard clients’ interests through asset allocation and diversification strategies.

• Given that just 3.5 crores of the 60 crore PAN card holders participate in MFs, SEBI should also acknowledge the expansion of MFs to remote areas.

• The industry should make distribution a sustainable business and encourage more financially intelligent people to pursue MF distribution as a profession in order to further the Centre’s goal of improving financial literacy in smaller areas. In 2012, SEBI first provided the incentive to B15, and in 2018, it was increased to B30.

What are T30 and B30 cities?

All registered commission agents can access the commission structure that AMFI has established for mutual fund agents. Cities have been divided into three categories under the arrangement.

• Tier I cities
• Tier II cities
• Tier III cities

Tier I cities are the top 30 cities (T30), and tier II and III are B30 cities that are beyond 30 cities. Greater metropolitan cities and T30 cities like Delhi, Mumbai, Pune, Bangalore, Kolkata, Lucknow, etc., other than T30 cities, balance is known as Beyond 30 cities.

All Tier I cities fall under T30 (Top 30), and the remaining cities fall under B30 (Beyond 30), which includes both Tier II and Tier III cities. Due to the limited knowledge and adoption of mutual funds in these cities, special incentives are provided to local brokers in order to encourage investment there. 

So, it still needs to push the mutual funds for wider penetration to ensure that new investors into the market-linked segment in the vast untapped territory of B30 locations (B30 denotes tier 2, tier 3 cities beyond the top 30 cities (T30)).

Responsibilities of a Mutual Fund Distributor

Addressing an investor’s fears is part of giving investing advice. A qualified professional who has the necessary experience, education, and skills can provide wise financial advice. As a result, investors should speak with a licenced mutual fund representative who has relevant experience. The responsibilities of a distributor of mutual funds include the following:

• Investor Education
  Based on the investors’ financial objectives, the mutual fund distributor must create an appropriate strategy for them. The retail investor needs to be educated on how to accomplish them. It also entails looking into other investment possibilities. It makes assessing how each may affect or facilitate the client’s financial objectives easier.
• Evaluating Risk Tolerance 
  A distributor of mutual funds may make an investment recommendation based on the investor’s level of risk tolerance. For instance, equity mutual funds carry a higher level of risk than debt ones. As a result, not every retail investor may always think about stock funds. Hence, when creating an investment plan, the distributor must take into account the long and short-term financial goals, investment tenure, age, family status, total expenses, and current financial obligations.
• Creating an Investing Plan
  After evaluating the customer’s various investment possibilities, the mutual fund distributor develops an appropriate investment strategy. They diversify the portfolio and reduce risk while maximising return. That method combines many investment possibilities. As an illustration, you could create a portfolio by combining some equities mutual funds with some debt mutual funds.
  The portfolio of the investor needs to be evaluated frequently. The client’s goals could vary. Hence the assessment is required. Thus, the distributor must keep a careful check on the client’s portfolio and recommend revisions as and when required.
• Helping Investors with Portfolio Diversification
  The distribution of the overall risk of the portfolio is greatly aided by diversification. As a distributor, it is crucial to stay updated with the current market conditions and new items being launched. Also, extensive research is done to identify the top investment opportunities across markets and sectors. 
• Documentation
  A mutual fund distributor’s ability to handle the client’s private financial information is essential. As a result, they must keep a record of the services they render. For instance, a list of all transactions, service descriptions, and bills. This documentation is required during the regulatory body’s audit of the company.

Functions of Mutual Fund distributors

A mutual fund distributor’s role is more complex than simply pitching mutual funds to investors. The several tasks that MF distributors complete include the following:

• To give investors trustworthy financial advice, keep up with the movements in the securities market.
• By communicating with mutual fund managers, you can stay informed about upcoming mutual fund plans. The financial specialist should also provide studies on the previous and future performance of various sectors.
• Publish in-depth reports on a range of mutual funds and their programmes.
• Talk with prospective clients about investment opportunities.
• Inform these prospective customers about mutual funds, schemes, returns, risks, fees, and other aspects of investing in mutual funds.
• Assist them in determining the best mutual fund investment choice for them based on their risk tolerance.
• Help their customers invest in mutual fund plans of their choosing.
• Ask their clients about their experience investing in mutual funds and address any confusions they may have.
• To reduce risk and increase investment returns, give timely guidance.

Conclusion

In India, mutual fund distributors are frequently compensated with commissions based on the assets under management (AUM) of the funds they sell. The asset management company (AMC) that oversees the fund normally pays the commission, which is then transferred to the distributors. According to SEBI’s letter, it is preferable to suspend the B-30 incentive structure until AMCs implement efficient measures to allay the worries.

Also Read:
How Does a Mutual Fund Operate?
SEBI Guidelines for Mutual Funds Investors
Mutual Funds – Different types of Mutual Funds in India