Comments on: Total mutual fund costs http://www.subramoney.com/2009/07/total-mutual-fund-costs/ Personal Finance Sat, 11 Feb 2012 16:56:34 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Vithal http://www.subramoney.com/2009/07/total-mutual-fund-costs/comment-page-1/#comment-1059 Vithal Fri, 03 Jul 2009 03:10:26 +0000 http://www.subramoney.com/?p=1837#comment-1059 I liked Srikant's comment saying 'core' function of fund management. Well said. Most of the fund houses outsource r & t, - how many of them have the guts to 'outsource' sales? afterall sales is not a core function. NOBODY. To have enough margins you need to control - sales, loads, amc charges. Why cannot 50 distributors gettogether and float an amc with only index funds? It is quite easy to get somebody to come as a sponsor....the distributors suddenly manage the fund with a 'system' which could cost a few crores, but do not need a fund manager. I liked Srikant’s comment saying
‘core’ function of fund management. Well said. Most of the fund houses outsource r & t, – how many of them have the guts to ‘outsource’ sales? afterall sales is not a core function. NOBODY. To have enough margins you need to control – sales, loads, amc charges. Why cannot 50 distributors gettogether and float an amc with only index funds? It is quite easy to get somebody to come as a sponsor….the distributors suddenly manage the fund with a ‘system’ which could cost a few crores, but do not need a fund manager.

]]> By: Uma Kannan http://www.subramoney.com/2009/07/total-mutual-fund-costs/comment-page-1/#comment-1058 Uma Kannan Fri, 03 Jul 2009 03:00:34 +0000 http://www.subramoney.com/?p=1837#comment-1058 Had to join in on the debate! Fund managers need to be compensated well for sure. However the best performing fund houses tell you their 'systems' ensure results, not the people. So the compensation debate continues. The sales guys have to bring in the money. NOrmally the non monetary (cannot be given in cash) benefits are equal to the 'commissions' earned especially for the higher end guys. Have seen cheques in 8 digits for sales guys. Who pays for all this? For a first few years the shareholder, then the fund investor. How much a fund manager should be paid, how much the systems guy be paid, how much the sales guy be paid....the job market decides, not the customer. However I have seen customers with 8 and even 9 digit cheques squeezing EVERYTHING out of the fund house!! Had to join in on the debate! Fund managers need to be compensated well for sure. However the best performing fund houses tell you their ‘systems’ ensure results, not the people. So the compensation debate continues. The sales guys have to bring in the money. NOrmally the non monetary (cannot be given in cash) benefits are equal to the ‘commissions’ earned especially for the higher end guys. Have seen cheques in 8 digits for sales guys. Who pays for all this? For a first few years the shareholder, then the fund investor. How much a fund manager should be paid, how much the systems guy be paid, how much the sales guy be paid….the job market decides, not the customer. However I have seen customers with 8 and even 9 digit cheques squeezing EVERYTHING out of the fund house!!

]]> By: Srikanth http://www.subramoney.com/2009/07/total-mutual-fund-costs/comment-page-1/#comment-1050 Srikanth Thu, 02 Jul 2009 04:01:16 +0000 http://www.subramoney.com/?p=1837#comment-1050 Pooja, For every type of successful product, and products in the financial services industry are no exception, there is a point of inversion when it goes from a push product to a pull product. It is debatable whether MFs in India are at that point yet. When that happens, theories of open market competition will win out causing reasonable price/performance ratios. Having said that, I agree that rationalization of AMC charges should also be addressed by SEBI in the interests of the investors. And I know who you are referring to as "some characters"...we dealt with the same characters as well, and could not agree with you more... :-) Pooja,

For every type of successful product, and products in the financial services industry are no exception, there is a point of inversion when it goes from a push product to a pull product. It is debatable whether MFs in India are at that point yet. When that happens, theories of open market competition will win out causing reasonable price/performance ratios.

Having said that, I agree that rationalization of AMC charges should also be addressed by SEBI in the interests of the investors.

And I know who you are referring to as “some characters”…we dealt with the same characters as well, and could not agree with you more…

:-)

]]> By: Pooja http://www.subramoney.com/2009/07/total-mutual-fund-costs/comment-page-1/#comment-1049 Pooja Thu, 02 Jul 2009 03:41:38 +0000 http://www.subramoney.com/?p=1837#comment-1049 Srikanth, have been in the banking industry for the past 20 years and watched mf industry. Competition has not reduced costs for the end customer. 42 fund houses - nobody has dropped charges. Some characters had done away with the distributor but amc charges even for them is sky high (max!!) - they pay no trail. Could write a chapter on hidden charges - the worst is brokerage (and churn costs). To say good and well performing funds will collect money is like saying 'banks do not exist'. Instead of squeezing one part of the chain, sebi should have reduced the amc charges on equity funds from 2.5% to 2% max. High time they did that. Investors would have benefitted. Now the amc will part with the 0.5% to the distributor - after all not all investors are like you. For example I am too lazy to do the whole exercise of form filling, but my distributor rebates my whole commission (upfront for one year) even in an SIP because of the leads that I give him (i am now in HR and have no sales targets!!) Srikanth,

have been in the banking industry for the past 20 years and watched mf industry. Competition has not reduced costs for the end customer. 42 fund houses – nobody has dropped charges. Some characters had done away with the distributor but amc charges even for them is sky high (max!!) – they pay no trail. Could write a chapter on hidden charges – the worst is brokerage (and churn costs). To say good and well performing funds will collect money is like saying ‘banks do not exist’. Instead of squeezing one part of the chain, sebi should have reduced the amc charges on equity funds from 2.5% to 2% max. High time they did that. Investors would have benefitted. Now the amc will part with the 0.5% to the distributor – after all not all investors are like you. For example I am too lazy to do the whole exercise of form filling, but my distributor rebates my whole commission (upfront for one year) even in an SIP because of the leads that I give him (i am now in HR and have no sales targets!!)

]]> By: Srikanth http://www.subramoney.com/2009/07/total-mutual-fund-costs/comment-page-1/#comment-1048 Srikanth Thu, 02 Jul 2009 03:14:50 +0000 http://www.subramoney.com/?p=1837#comment-1048 OK, once again, your last paragraph caught me...here goes: 1. I presume you are making assumptions regarding growth over the 30 years of investments to arrive at the 2.5 lakhs figure for the 30th year. Without growth, 2.5 lakhs out of 30 lakhs would be close to 10%, and no amc charges that much as fund management fees. 2. The question is what a customer gets for the fees they pay. The entry load that is passed back to the distributor gets the investor, in most cases, clerical services like filling out forms and conveying to the R&T office. On the other hand, a mutual fund houses, manages money from thousands of people, hence needs to pay the R&T, as well as the core act of fund management with professional money managers. 3. Of course, the AMC would deserve it only if the fund is performing well over the long run. If a fund is turning in a "mediocre" performance, I hope the investor does not stick with it for 30 years! 4. True, there is a case to be made against exorbitant fund management fees. However, these fees are transparent and, in a competitive arena, investors can choose between performance and non-performance and weigh it over the fees charged by the AMCs. 5. In summary, when an investor buys a scheme, they can look at the performance and fees of different schemes and make their choice. When an investor chooses a distributor, they can look at the service and fees of different distributors and make their choice. Sounds fair to me. Till date, the situation was the distributors could not compete in terms of quality of service since they were all FORCED to get paid the same (via the entry load, which was not tied to the distributor, but to the scheme). Now this artificial leveler has been removed, and distributors can compete based on the services they offer and price themselves accordingly. OK, once again, your last paragraph caught me…here goes:

1. I presume you are making assumptions regarding growth over the 30 years of investments to arrive at the 2.5 lakhs figure for the 30th year. Without growth, 2.5 lakhs out of 30 lakhs would be close to 10%, and no amc charges that much as fund management fees.

2. The question is what a customer gets for the fees they pay. The entry load that is passed back to the distributor gets the investor, in most cases, clerical services like filling out forms and conveying to the R&T office. On the other hand, a mutual fund houses, manages money from thousands of people, hence needs to pay the R&T, as well as the core act of fund management with professional money managers.

3. Of course, the AMC would deserve it only if the fund is performing well over the long run. If a fund is turning in a “mediocre” performance, I hope the investor does not stick with it for 30 years!

4. True, there is a case to be made against exorbitant fund management fees. However, these fees are transparent and, in a competitive arena, investors can choose between performance and non-performance and weigh it over the fees charged by the AMCs.

5. In summary, when an investor buys a scheme, they can look at the performance and fees of different schemes and make their choice. When an investor chooses a distributor, they can look at the service and fees of different distributors and make their choice. Sounds fair to me. Till date, the situation was the distributors could not compete in terms of quality of service since they were all FORCED to get paid the same (via the entry load, which was not tied to the distributor, but to the scheme). Now this artificial leveler has been removed, and distributors can compete based on the services they offer and price themselves accordingly.

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