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No comeback for entry load

twitter-logoManu Kaushik | Print Edition: June 26, 2011

What's proposed: Newly-appointed Securities and Exchange Board of India, or SEBI, Chairman U.K. Sinha, who earlier headed UTI Mutual Fund as well as the Association of Mutual Funds in India, or AMFI, has decided not to lift the ban on entry load for mutual funds. Prior to the ban in August 2009, fund houses charged investors around 2.25 per cent of the amount invested as entry load to meet distribution and marketing expenses, including commissions.

While banning the entry load, SEBI had allowed funds to collect a maximum of one per cent of the amount invested as exit load from investors who sell out prematurely.

Its implications: The mutual fund industry has been reeling under the impact of the 2009 ban, resulting in redemptions a net outflow of Rs 18,044 crore as wealth advisers tell clients to shift to other products. The ban has also impacted new fund offers, or NFOs, of many equity funds.As per AMFI data, just 24 equity funds were launched in 2010, garnering some Rs 3,000 crore, compared to 33 NFOs launched in 2009 that mopped up Rs 7,284 crore. Besides, the ban has shrunk the revenues of distributors, forcing them to advise clients to either redeem their equity schemes or invest in insurance and fixed deposits, which earn them higher commissions. Currently, distributors are allowed to charge a fee from the investor, but they are required to follow a dualcheque system: separate cheques for the investment and the commission.

Benefits: The ban was aimed at bringing more transparency into the system, and its removal would have promoted mis-selling of products. Prior to the ban, different fund houses were paying a wide range of commissions to agents for selling their schemes. Agents often promoted funds that promised them the highest fee. Persisting with the ban will result in heightened competition among distributors and ensure better customer service.

Alternative model: Some feel SEBI has gone overboard in trying to correct the wrong practices and ended up discouraging distributors from selling mutual funds. "There are many good products in the market, but nobody is selling them and, therefore, there are no buyers," says Sanjay Matai, promoter, Wealth Architects, a Pune wealth advisory firm. SEBI has set up a panel to devise a new incentive model for distributors, in which investors could be asked to pay a service fee, while commissions for distributors could be borne by the asset management companies.

Global experience: In developed countries such as the United States, Canada and Britain, mutual funds are divided into three categories: with front-end load, back-end load and no-load options. When buying a mutual fund with a front-end load, the investor pays an up-front commission. In the case of funds with the back-end load, a fee is charged at the time of redemption. No-load funds can generally be purchased or redeemed without a sales commission.

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