IN A move that is expected to create a flutter among mutual fund distributors, HDFC Mutual Fund has asked its distributors to refund a part of the brokerage they received for selling fixed maturity plans, as a result of premature redemptions.
HDFC MF — the country’s second-largest mutual fund in terms of assets under management — has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the ‘unexpired period’.
What this means is that distributors are paid the entire brokerage upfront, assuming that the investor will stay invested in the FMP through its maturity. If an FMP had a maturity period of one year, and the investor withdrew from the scheme after nine months, the broker will now have to refund the brokerage for three months. Understandably, some of the HDFC Mutual Fund’s distributors who have been slapped with this demand are up in arms.
The letter to distributors, says As per the terms of the brokerage payable for each plan, in case of redemption by the investor before maturity of respective plans, the gross upfront brokerage paid to the distributor for collections during the NFO period would be recovered from them (proportionate to the unexpired period).
The move has surprised industry officials, because most asset management companies tend to cosy up to mutual fund distributors, who are seen as vital for sales of their schemes. This is the first ever instance of a fund house doing something like that. The distributors’ role is to advise investors at the time of investment. Once the sale is made, they have done their job. Thereafter neither can a fund house, nor a distributor dictate/control the actions of an investor.
Brokerages are paid for the period of investments. However, it is computed for the entire duration and paid in advance. Therefore, in case of premature redemption by the investor, HDFC AMC has a consistent policy to recover the proportionate brokerage only for the unexpired period. Its in the interest of the investor to seek, advise and invest through AMFI-certified distributors and the business received directly is insignificant.
On their part, distributors believe that it is not correct to seek a refund of brokerage from distributors when the fund house has charged an exit load from investors, who have redeemed prematurely.
HDFC MF — the country’s second-largest mutual fund in terms of assets under management — has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the ‘unexpired period’.
What this means is that distributors are paid the entire brokerage upfront, assuming that the investor will stay invested in the FMP through its maturity. If an FMP had a maturity period of one year, and the investor withdrew from the scheme after nine months, the broker will now have to refund the brokerage for three months. Understandably, some of the HDFC Mutual Fund’s distributors who have been slapped with this demand are up in arms.
The letter to distributors, says As per the terms of the brokerage payable for each plan, in case of redemption by the investor before maturity of respective plans, the gross upfront brokerage paid to the distributor for collections during the NFO period would be recovered from them (proportionate to the unexpired period).
The move has surprised industry officials, because most asset management companies tend to cosy up to mutual fund distributors, who are seen as vital for sales of their schemes. This is the first ever instance of a fund house doing something like that. The distributors’ role is to advise investors at the time of investment. Once the sale is made, they have done their job. Thereafter neither can a fund house, nor a distributor dictate/control the actions of an investor.
Brokerages are paid for the period of investments. However, it is computed for the entire duration and paid in advance. Therefore, in case of premature redemption by the investor, HDFC AMC has a consistent policy to recover the proportionate brokerage only for the unexpired period. Its in the interest of the investor to seek, advise and invest through AMFI-certified distributors and the business received directly is insignificant.
On their part, distributors believe that it is not correct to seek a refund of brokerage from distributors when the fund house has charged an exit load from investors, who have redeemed prematurely.
