MUTUAL FUNDS
A mutual fund is basically a kind of investment that uses money from many investors to invest in stocks, bonds or other types of investment. A fund manager (or "portfolio manager") decides how to invest the money, and for this he is paid a fee, which comes from the money in the fund. But in the present scenario the fund flow sector has dried up, maybe because of the stringent regulatory restrictions on the remuneration of the mutual fund distributors, brokers and their agents.
Recently, the regulator has amended its rule, allowing mutual funds to raise the share of investors’ money which they allocate towards the cost of services. Moreover, now, the fund houses are themselves eating up the distributor’s revenues, by asking brokers to absorb the service tax, which has reached a to a new hike of 14%, in the commission they receive from fund houses. This once again has the potential to strain distribution and slow down the process of investors channelling their funds to the market through mutual funds.
Distributors play a crucial role in providing services to both fund houses and investors and for the same recovers the price of the services rendered to them. Fund houses pay for that service with a commission. Service tax applies on the service and incidence should be on those who buy the service, that is the fund house. Investors do not directly pay for their services. Investors are charged service tax on the fees they pay, while fund houses should pay service tax on the lower commission they pay, once a part of the distribution cost is borne by the investor.
At the present time, the cost to equity fund investors has grown manifolds and has reached a new height of 3% of the investments. This has to be brought down. Taking the brokerage fee out of mutual fund costs is one way. Direct investments, without the help of a broker, is another. That calls for aggressive investor education. A good fund, ultimately, is one that delivers good returns with minimal expenses. Mutual funds should invest in low-cost distribution models, make their products simple and compete on these qualities.
