Removal of entry load

Removal of entry load

Removal of entry loads on all mutual fund schemes by Sebi from August 2009. It was a step up from exemption to direct applicants only.

Removal of entry loads on all mutual fund schemes by Sebi from August 2009. It was a step up from exemption to direct applicants only.

The removal of entry loads was intended to bring in more transparency in the payment of commissions to fund distributors and to incentivise long-term investment. By doing so, Sebi also aimed to link the distributor's fee to the services provided by him. This, in effect, means that in order to be compensated well, the distributor must provide service that is valuable to the investor.

The impact of the ban on entry loads has been multifold and radical. It has ensured that distributors no longer thrust new fund offers on investors just so they can earn high commissions. Earlier, mutual fund investors had to pay a 2-2.5 per cent entry load if they used the services of an adviser/distributor.

Daily SIP was introduced by the Bharti Axa MF in September 2008. The idea was to push regular investing and spread risk. The idea triumphed when daily SIPs outperformed the monthly SIPs in the 2008 volatility.
They could avoid this by approaching an asset management company (AMC) directly, but very few investors had the means, time or inclination to do so. However, what they didn't realise was that when the advisers recommended frequent buying and selling, they lost 2-2.5 per cent of their money every time they churned.

Sebi's diktat on getting rid of the entry load was to safeguard the interest of such investors and make mutual fund investments more economical by reducing the loads borne by them. This also implies that the returns earned by the investors will be higher.

When the proposal was announced in June 2009, C.B. Bhave, chairman, Sebi said, "Now, mutual fund investors will be deciding how much commission they want to pay and will be paying it directly to distributors. This will hugely empower mutual fund investors and force distributors to stay competent to justify their role. In an investor-dominated market, the competition will ensure a lower rate of commission and higher quality of service."
Despite opposition from almost all distributors, Sebi went ahead with the reform, saying that "it is the result of a process and not as per anybody's likes or dislikes".

In fact, according to K.N. Vaidyanathan, executive director, Sebi, the ban has roughly translated into a saving of Rs 1,300 crore for investors (the entry load charge saved in the past 13 months), which has been put to more productive use. The reform had another positive impact: it got rid of fly-by-night distributors who did not have adequate knowledge about mutual fund operations, yet blithely enticed investors to frequently churn their portfolios.

In the survival of the fittest, only those distributors have survived who can give beneficial advice as well as provide additional services, such as customised portfolio construction, regular portfolio review, financial planning, etc. However, this has also led to more ambiguity about the fee an investor should pay for the service he is getting.

"There will be transition issues, but if an investor wants to continue to take advice, he should be willing to pay for it," says Vaidyanathan. Investors were anyway paying a 2-2.5 per cent entry load on funds, which often did not include additional services.

One of the most strident protests against the ban was that distributors would have no incentive to sell mutual funds and would instead steer investors to instruments such as Ulips that allowed high commissions.

To avoid this, AMCs have been designing innovative distribution channels to cater to the different needs of an investor. Distributors too are overhauling their services.

Rajeev Deep Bajaj, vice-chairman and MD, Bajaj Capital, said in an interview to MONEY TODAY: "Due to the abolition, we had to change our commission-based model to one based on both commissions and fees. This has made us more accountable and helped us improve our services. As a result, we are seeing a rise in volumes." Despite teething problems, the far-sighted regulation is having a positive impact, one that the mutual fund investor is beginning to appreciate.

 Making way for a win-win situation

The no-load regime is aimed at brining in more transparency and encouraging long-term investment

In the past few years, the mutual fund industry has witnessed several regulatory changes, which have been aimed at making the product more investor-friendly and encouraging retail participation. While these measures will help the industry move towards inclusive growth and increase investor confidence, it will take some time for these to filter in.

One of the biggest changes has been the ban on deduction of marketing and distribution charges, or entry load, from investments by subscribers. Entry load meant that less of the subscribers' money was being invested. The market regulator has mandated that investors pay the fee directly to distributors. The noload regime is ideally a step towards fee-based advisory, aimed at bringing in more transparency and encouraging long-term investment.

Some investors can take decisions independently, but a majority depend on financial advisers. Now, such people can avail of advice and, unlike previously, will be fully equipped to negotiate directly with the adviser and fix a commission based on the services offered. Like other professional services, the adviser will charge a fee as it will also involve prescribing a solution to investors.

Another change in the mutual fund industry has been the rise of a new platform for reaching the masses. Earlier, mutual funds had provided the online investment facility more as a convenience, but it has now blossomed into an independent channel. With the rising Internet penetration in the country, an increasing number of companies is offering funds online.

The online facility of investing in mutual funds has become user-friendly and simple. Now, the investor doesn't have to wait for an agent or go to the fund house office to purchase or sell units. Even restructuring portfolios has become easier, with most funds offering a host of value-added online services, which include purchase, switch, redemption and investing in new fund offers.

Apart from this, the investor can assess his portfolio and download account statements. The online availability of funds not only reduces the time and effort spent by investors, but also enhances the experience of investing.

CEO, Birla Sun Life Asset Management Company