In whose interest?

Market regulator Sebi has introduced several regulations in the recent past to protect the interests of mutual fund investors. These include disallowing amortisation of marketing expenses for NFOs, removal of entry loads for direct investment and, subsequently, complete abolition of entry loads. In the latest move, it has asked the funds not to dip into exit/entry load accounts to pay the distributors upfront. The result is that the profit margins of the mutual fund industry are shrinking, distributors have moved to areas like debt products, and investors find themselves in a vacuum, with no one to service them. So, do these measures actually benefit investors?

The fallacy
The entry load removal was justified by saying that distributors were pocketing the charges and not advising clients. Distributors received 2 per cent as transactional fee, which covered incidental expenses, and if they offered advise, the charges were higher. Sadly, the distribution charge was seen as advisory fee.

Most investors would be happy to pay the distributor for a complete bouquet of services and some have even questioned the new, convoluted method. The problem is that though investors understand it is the same charge, it hurts to write another cheque. This is where the distributors have been hit. It becomes a fertile ground for haggling on fees — some investors don't want to pay and threaten to go direct, while others want to pay a fraction of the charge. Investors are not mature enough to write a cheque and distributors aren't mature enough to charge for their services. So, many ditributors have given up. Why would they want to promote funds when debt products give them 1 per cent in commissions? Sebi should have formulated a training programme for distributors instead of foisting the no-entry load regime without giving them time to adjust.

The facts
With no distributors to promote their products, only the top 10 mutual funds are estimated to remain profitable. The equity AUM too fell between August 2009 and March 2010. However, they have been painted as avaricious dons who send their henchmen, the distributors, to deprive the citizens of their hard-earned money. The fact is that mutual fund is a low-risk route for lay investors to participate in the India growth story. Direct investment is riskier and not for everyone. Also, the money stays invested for a longer period compared with that in direct equity, where day trading and short-term trading are rampant.

Regulations that strangle the industry are hardly in investors' interests. Besides providing a level playing field, regulators should be in touch with ground realities and consult all stakeholders before taking such far-reaching decisions.

No entry loads: After-effects

• Investors are not willing to pay separate advisory fees.
• Distributors are no longer interested in promoting mutual funds and have shifted to selling the more lucrative debt products and insurance.
• While selling of mutual fund products has fallen, mis-selling continues.
• The mutual fund industry's profit margins are shrinking. Also, the equity AUM fell between August 2009 and March 2010.

The writer is a certified financial planner.