Mutual funds can reduce cost to investors by using Internet as a medium
Sales and marketing expenses account for over 75% of an Asset Management Company’s total expenses. The commission payable to distributors takes up a lion’s share of the sales and marketing expenses. Mutual funds pay distributors anywhere from 0.75% to 1.75% for selling equity, debt and hybrid funds. The cost is recovered by charging management fees to investors, which runs up to a maximum of 2.25%. Over and above upfront fees, distributors receive trailing fees of 0.25% to 0.75% for as long as the investor is invested in a mutual fund scheme. The investor as usual bears the brunt of the commissions paid out to distributors as management fees are kept at maximum levels.
The distributor is supposed to educate and transmit information to investors to earn fees paid out to mutual funds. This does not work, as the distributor sells funds that pay out higher commissions and will even provide inaccurate information to sell funds to investors. The regulator SEBI is concerned with the role of the distributor in the system and has taken many steps to reduce the so called power of the distributor over a fund house including keeping a watch on the commissions paid.
The question to ask in this time and age is “are distributors really necessary to transmit information to an investor?” The answer is a clear no. Internet has become the transaction platform of choice to the investor. Every investor has a bank account, which enables her to transact any asset class of her choice. She can buy and sell equities, mutual fund schemes, currencies and commodities. She can buy insurance and pay bills.
Given that the investor is on the net doing transactions, the amount of information disseminated over the net is huge. Investors can read up on equities, evaluate mutual fund schemes and take advice of where and when to invest on the Internet. The investor does not need a physical presence to tell her what, where and how to invest. The Internet does it for her.
Mutual funds should use the Internet to transmit information to investors. They can use various media platforms to draw the investor to their site and learn about their products and its superiority over their competitor’s products. Mutual funds can use the services of independent, unbiased experts to educate and transmit information to investors. Mutual funds can make distributors go online to provide services to investors.
Eliminating the physical presence of a distributor in front of an investor can save mutual funds and investor’s tremendous amounts in terms of fees and expenses. The world is moving towards a scenario where everything will be available on the Internet thereby lowering costs for the consumer. The sooner mutual funds embrace this scenario the better. Regulators too should ensure that internet as a medium should be used more effectively by mutual funds and make sure the management fees drop on better information transmission efficiencies.