Sucheta Dalal :Upfront commission being granted for ELSS schemes
Sucheta Dalal

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Upfront commission being granted for ELSS schemes  

March 26, 2010

Fund houses are providing an advance lump-sum upfront brokerage for
equity-linked saving schemes (ELSS) in an attempt to woo distributors.

SBI Mutual Fund is giving an upfront brokerage of 2.25% for its Magnum Taxgain Fund which includes trail commission. No trail commission is paid for three years. Even Morgan Stanley is offering 2.5%-3% upfront commission.

ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses are passing on the commission in advance.

According to industry sources, HDFC Mutual Fund is giving a three-year lump-sum commission of 3% upfront for its ELSS schemes.

“HDFC has two tax-saving schemes. When the entry load was banned by the Securities and Exchange Board of India (SEBI), HDFC was giving 1.75% upfront commission and for the other scheme they were giving 4% upfront commission but no trail commission for three years,” said a certified financial planner (CFP).

HDFC Mutual Fund declined to comment on the issue.

Sources say that the upfront commission spells good news for distributors but the flipside is that investors may start demanding rebate from distributors especially during March, when people rush to put money in ELSS schemes.

“The investor goes on a kickback shopping. Whoever gives the investor highest kickback, he will invest with him,” said an IFA.

“There will be no long-term loyalty with the customer. The new broker will not get any commission because it’s paid in advance in case of ARN change. SEBI officials say that rebating should not be given,” said a source.

If an investor opts to change his distributor, then the new distributor does not get the trail commission because it’s already paid in advance to the old distributor. Sometimes fund houses decide the terms of brokerage with the distributor.

An email query sent to Morgan Stanley remained unanswered. — Moneylife Digital Team

-- Sucheta Dalal