Mutual fund commissions vs. Unit linked plan commissions
Continuing my dialogue series…
Journo: Subra do you not think the life insurance guys get pampered?
Subra: Why do you say so?
Journo: 40% of the contribution as a commission is too much, do you not think so?
Subra: What about products with 122% commission?
http://www.subramoney.com/book-written-by-me/
J: Not possible in the financial service industry…..at least not in India
S: In India, in financial services, existing product, ….dekhnewala chahiye that is all.
J: Which is the product?
S: Mutual fund….
J: Will you please explain…???
S: take an excel sheet calculate for an SIP of Rs. 10,000 per month for 30 years…fund growing at 12%..0.5% trail…see the commission from the 21st year to the 30th year…it ranges from 41% to 122%.
J: OMG! This cannot be true…why is the media not talking about it?
S: You are the media…why are you asking me. Just do your homework…use excel
J: what is the catch in what you have said….can I do a story.
S: First understand..then write. What is wrong is the Time value of money has not been considered, nor has tax been considered. However anything that you do…mutual fund commissions are better than life insurance business. The smart online distributors like (they did not want to be mentioned) know that..
J: Such a revelation sir….
S: Imagine you spent Rs. 7 lakhs on an MBA degree….
Srikanth
🙂
21st to the 30th year? What wonderful paradise of perfect investors’ world do you live in?
The average mutual fund holding period (retail, equity, including SIP) is 2-3 years.
I wish the numbers were as sweet as you indicate (obviously), but they ain’t 🙂
Srikanth (FundsIndia.com)
subra
The average investor believes all that his adviser tells him. Adviser believes all that the fund salesmen tell him. The fund salesman has a target to achieve.
The ideal investor invests in his health, takes a medical insurance, a term insurance, and invests in an index fund @ 0.25% amc – and the amc does not pay trail to the distributor. However like Santa Claus the ideal investor is a fictional character.
However if an ulip is available @ 0.8% amc the fact that it has a 30% load does not matter. You can top up and dramatically reduce the costs (know a few people who have done that). If you take a 40% load product and stop paying in 3 years…God save the ‘investor’. The avg. holding in a mf will improve – if Nfos are banned and the incentive to churn is removed.
But there are big distributors (individuals) earning about Rs. 5 crores in trail – not bad right?
viswanath
Srikanth is correct, money does not stay in any scheme for more than 2-3 years. However Subra is also correct. An investor used to invest Rs. 10,000 in one scheme..then the SAME advisor used to churn it from fund A to fund B. Thus he was earning 2.5% on THE AUM. If the 10k had become 11k..then 11k would get invested. So in a mutual fund ALSO the distributor made money WITHOUT earnin trail, as there was an incentive to churn. For a distributor who did not churn, there was a piddly 0.5% trail, for the dist who curned there was 3%(for the bigger guys MUCH more)of the Aum. Of course we also know of distributors who churned ULIPs…LOL!! 🙂
drkhann
Index fund with 0.25% AMC with no trail.. Does such a fund exist in India.. If so please tell me the name Subra.. Ill start a SIP in it..
subra
no Dr. Khan it does not exist. I know of one excellent fund manager who charges 3% p.a. and has beaten the index by a mile over the past 20 years plus. However he takes money only in multiples of Rs. 5 crores.
Even if there were to be an index fund with 0.25% amc it would be only in multiples of Rs. 25 lakhs + a sales charge + a 4-5 year lock in. Please understand that custody charges + admin etc. in India will not allow an index fund with such a low amc to exist. However money making is not about COSTS ONLY. It is about discipline, patience and a honest fund. Look at Templeton India Growth fund. It is a scheme with all these characteristics. HOWEVER it has a corpus of < 1000 crores, hence it is expensive.
Pravin
are current ETFs offered by Benchmark worse or better than the idealized index fund you described.if worse,are they better than everything else? assume standard brokerage charges for icici or hdfc securities
Chaitanya Patel
Hi Subra
I created the Google spreadsheet showing different return % and the trailing comission.
It is published at https://spreadsheets.google.com/ccc?key=0AtCIp6Sek5T_dG9ydFhHdWctbzQ3Y0h2ZmlObWNzVXc&hl=en
Regards
Chaitanya
subra
hi Chaitanya
nice calculator. Hope people see it. What the mf agent earns is the sum total of the trail commission….which is far, far, higher than the insurance agent’s commission…LOL
Puneet
As individual investors…should we really bother about trail commissions?
And in any case..is there a way out?
for instance, in I decide to approach the fund house directly..will this make any difference to my returns?
Balaji
I think if we directly invest by sending the application to AMC by mentioning broker name as NIL(which many have started doing now) there wont be any trail commission. ULIP still lacks that.
the money paradise
I agree with you that there is huge money for mutual fund agents.
It is somehow tricky for investors to understand. it is presented that they are paying no commission. and it really works
Param
Balaji,
Unfortunately, MF will still charge trail commission. Only since it is not paid to a broker, they can spend it on ads that you can enjoy. As of today, only Quantum promises not to charge trail commission as it is not sold thru distributor – i hope they keep the promise…
Regards, Param
Srikanth
Param,
No AMC “charges” trail commission. They charge a fund management expense that contain all charges for the AMC including trail commission paid to brokers who service the investments made by the investors.
The FM Fee is capped at 2.5%. So, trail commission included, no AMC can charge more than this. Many AMCs charge much less than this.
And, guess what, Quantum charges the maximum FM fee for its funds. So, an investor stands to gain ZERO rupees because Quantum does not pay servicing fees to the distributors 🙂
Jago, investor, Jago! 🙂
subra
Too much is made of charges :). You worry about charges ONLY AND ONLY after QUALITY is established. You cannot compare a footpath tea shop with a Taj (I love the Saravana filter coffee as much as the Taj Connemara coffee, by the way – price be damned). In fact in Delhi FREE breakfast is sacrificed (at say a good hotel) for a nice b’fast at Saravana bhavan. How do you think will Quantum be able to attract a good FM? It is tough. You need to know a couple of them – and the way they compare themselves. Frankly in the current market I would pay an arm and a leg for guys like Prashant Jain, Naren Sankaran, the Templeton Team, the Hdfc team, Nagnath…an extra percent will not matter. I know of friends who pay 1.5% brokerage (with investment volumes of Rs. 5 -7 crores a year :). Value, gentlemen, not price is important..
Dr. Vijayendra kanwar
Financial wisdom in India is pathetically low, ULIPS r being mis-selled everywhere!
Just few Golden points to ur readers
1- Be finincially literate!
2- start early in life
3-Avoid ULIPS if u r over 45 yrs
4- never mix Investments & insurance guys—that is very bad 4 ur (financial) health!
5- consider mutual funds (SIPS), PPF, NPS over ULIPS/Money back & endowment schemes
ALL THE BEST
Prasenjit
Hi Subra-
I was forced to take a ulip (SBI-smart ulip) while applying for homeloan. HE explained me , that being a bank employee they dont get any commission which i doubt.Do they get the same amount commission.
Thanks
Prasenjit
RK
Hi Prosenjit, can you please email me your experience at ritukant.ojha@expressindia.com?
subra
hi Prasenjit
No he gets no commission. His bank gets anything between 6% to 40% commission. Some of these rates have come down recently. He gets a salary …but has targets.