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.

Tanvi Varma/Money Today        Print Edition: November 2010

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.

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