Mumbai, June 22: An Asian Development Bank study on mutual funds has recommended that government-assured schemes be made less attractive to give private asset-management firms a level-playing field.

“If government-assured schemes were made less attractive and the taxation policy favoured longer-term investment, the potential for distribution of mutual funds would be greater in urban and rural areas,” said the study, conducted on behalf of the finance ministry.

If the suggestion is accepted, asset management companies (AMCs) can expand retail distribution and rework their charges. The report recommends the formation of a working group between those responsible for regulation of life assurance and pension products and mutual funds. The panel, with appropriate industry representation, should see how a regulatory regime could be introduced over the next three years.

The “tied agents” — those engaged by a life insurance company or a mutual fund group to sell its proprietary products — need not be considered under this regime since their conduct can be considered entirely the responsibility of the firms they represent, the report added.

The advisers should have sufficient data to make a relevant and suitable recommendation for investments. “Consider a fee-based advisory system. We are not suggesting that this should be a mandatory approach, simply one that is offered to clients as a choice. They can either pay a fee, or the adviser can be paid a commission on the products purchased,” the report added.

Given the increasing trend in developed markets to seek advice on investments — advised sales account for around 55 per cent of the cash managed by US mutual funds — India could try to head off the problems related to commission-driven sales seen in other countries, ADB said. It should establish the principle that clients should pay the person advising them on their financial planning a fee for the advice, just as they would pay a lawyer or accountant, the report added.

The charges currently permitted for mutual funds in India is largely based on the US system, whereby certain costs related to distribution can be tied to the fund.

In the UK, the cost of distribution of a fund is paid either out of the front-end load payable to AMC which, in turn, pays commissions. The other way is a trail fee, paid out of the asset management firm’s annual management fee.