No entry load for MFs – Who stands to gain?

In what seems to a big blow for mutual fund distributors, may also turn out to be a big loss for the Indian mutual fund industry. The Securities and Exchange Board of India (Sebi) on Wednesday proposed to do away with the "entry load" fee for investors if they buy mutual fund schemes directly from fund houses.

Currently, all investors irrespective of whether they come through a distributor or directly are required to pay an entry load, which is around 2.25% of the money invested. This charge largely goes towards paying the brokerage or commission of the distributor. (Know more - SEBI mulls entry load waiver for direct MF investments)

Experts believe that this initiative is good for an investor who is equipped to make his/her own decision on choosing of schemes and has time to visit mutual fund office directly as he will save substantial amount. However, they have their concerns and suggestions too...

Sandeep Shanbhag, Investment expert

• Will inhibit market presentation. As it is, retail participation in the capital market is extremely low as compared with the percentage of household savings. This will be further inhibited as MF distributors were indirectly serving as catalysts for the retail investor's participation in the stock market.
• Will encourage rebating/giving a kickback of the commission
• After sales services that the distributor provided will henceforth be the client's responsibility.
• There should be consistency in policies across products. ULIPs, which are nothing but mutual funds of insurance companies, continue to dole out huge incentives.
• Large MFs especially bank sponsored ones will have an unfair advantage over smaller players on account of their inherent geographical reach.

Hemant Rustagi, Investment advisor

• Considering that mutual funds offer a variety of products, it would be difficult for investors to select the right ones and in the right proportion in the absence of any advice.
• There are possibilities that investors might be tempted to invest in funds just by looking at the advertisements and the themes highlighted in them.
• As in any industry, mutual fund industry also has “below average”, “average” and “excellent” performers. One requires a thorough understanding and research to select the consistent performers.
• Monitoring of the portfolio on an on-going basis is as important as designing the portfolio. Most investors do not have the tendency to monitor their investment and hence might remain invested in the non-performing funds and/or miss out on better opportunities.
• Considering the potential of equities over the longer term, loads are a non-issue for a long-term equity investor.
• The entry load covers expenses like brokerage, advertising, sales and printing costs etc. Apart from the brokerage, mutual funds will not be able to segregate the cost for those who come directly and those who invest thru distributors. In case of no entry load, it would be an additional burden for the AMCs.

Gaurav Mashruwala, CFP

• Over a period of time several Life and Non-Life insurance product should also have similar option.
• Let there be complete free pricing. Let investor and distributor agree on the load. There should be a box on every application form. In the box agreed load amount/percentage should be placed and be initialed by distributor and investor. AMC and/or insurance company from the investor's investment (premium) amount should deduct agreed rate and pay to distributor. Rest of the amount should be invested/insurance issued. This will bring tremendous transparency.

by Reena Prince