K.N. Vaidyanathan, Executive Director, Sebi, tells Tanvi Varma how changes in the mutual fund sector over the past year have affected investors.
What necessitated the removal of entry loads in mutual funds?
The entry load constituted two components. One was a commission from the AMC and, the other, an advisory fee to the distributor. We have attempted to bring transparency to this process. If the entry load includes a component from the AMC, it has to be given by the company, while the advisory fee must be paid directly by the investor. We have not banned the advisory fee or said that the AMCs cannot pay agents directly, but the investor should know about the services he is paying for.
Do you think the ban has benefited retail investors?
Since the entry load was banned 13 months ago, the investment in mutual funds has been Rs 65,000 crore. So, investors have saved roughly Rs 1,300 crore, which was earlier being paid as entry load. Only about Rs 98 of every Rs 100 invested was being put in the market. Now, the entire amount is being invested.
Agents have quit the sector after the ban. Do you think this has hurt individual investors?
Anybody who is interested in mutual funds can invest in them through multiple avenues. However, if one swears by an agent's advice, he has to pay him just as AMCs are giving distribution commission. Of course, the small distributor also has to make up his mind about whether he wants to represent an insurance company, wherein he has to live off the commission, or if he has the wherewithal to be an adviser.
What do you think of the other options-stock exchanges and the Net-for investing or trading in mutual funds?
Exchanges have a record for providing the lowest transaction costs. The cost of intermediation through exchanges is about half a basis point, while the comparable cost for the mutual fund industry is 8 bps. This is why we have facilitated transactions through exchanges and allowed units to be held in the demat form. We have also asked registrars to give consolidated account statements for mutual fund investments, which will be implemented in October.
Several changes have been made in the Ulip as well. Do you think more needs to be done on this front?
This is a question better answered by Irda. It will suffice to say that today we have a product which is better than what it was. Now, the finance minister wants to see a no-load trend in financial products. Compare this with the 1980s, when commission was paid by banks for deposits and it was equivalent to an entry load. But it's long gone.
Are there any other changes to look forward to?
We have done a lot and will continue doing so. Regulations are in place to fix certain loopholes and provide for new initiatives. As long as the markets are dynamic, this process, which is driven by investor protection, will continue.