Mutual Funds – Impact of abolished entry load

Good news for you, now there will be no entry load for your Mutual fund investments! The Securities and Exchange Board of India (SEBI) has recently abolished entry load for investing in mutual funds.

Earlier in August 2007, SEBI had directed that Mutual fund investors will not have to pay entry load if they invest directly with fund houses instead of routing the investment through brokers or distributors. Then, fund managers had largely welcomed the decision, however they felt that the move will only benefit investors who are smart enough to pick the right scheme from the universe of MF offerings, but not all.

Now with entry load completely gone from the Mutual funds investments, the benefit will be to all MF investors.The only party loosing out on this decision are Mutual Funds agents and distributor. Fund Managers too does not seem to be happy with the decision.

SEBI’s new guidelines stipulates that investors directly make payments to distributors instead of MF companies deducting it from the investment made in any scheme.

Impact on Mutual Fund Agents and Distributors

Agents and Distributors use to sell Mutual Fund schemes to investors who were required to pay an entry load. This load was around 2.25% of the money invested. Asset Management Company used this charge towards paying the brokerage or commission to the distributor.

With zero entry load, now the Mutual Funds agents and distributors will have to find a new revenue model to operate. Many public and private sector banks were also providing wealth management and investment advisory services to their customers by primarily distributing Mutual Funds and Insurance products as part of there fee-based business. The revenue from these services were coming by way of sourcing commissions from AMCs and Insurance Companies.

Most likely, they will have now have to re-invent their revenue models and start to negotiate a service fee or a commission directly with the Mutual fund investors similar to the brokerage and commissions charged in stock broking and real estate transactions.

Impact on Mutual Fund Investors

In terms of cost saving, this decision might not be very advantageous to the investors, but the transparency factor that this decision brings will be beneficial to the Mutual fund investors in the long run.

Mutual Funds Investors were ignorant of the entry load as the agents and distributors seldom discussed it with the Investor. Further, there was a prevalent practice of commission pass-backs, even though this was banned by AMFI Guidelines & Norms for Intermediaries (AGNI).

Further, agents and distributors used to hard sell schemes to investors which provided better commission payout to them. This was against the very premise of providing sound investment advice. Although, still Agents and Distributors have no obligation to disclose non-cash incentives offered to them by Asset Management Companies for promoting specific mutual fund schemes.

Today, many retail investors depend on distributors for investment advise. Ultimately, the cost of sound financial advice will be levied to the investor but the investor can choose who he wants the advice from and the amount of money that he is willing to pay for the advice. Similar to the model with which some Wealth Managers and Certified Financial Planners work. These CFPs provide financial planning services to individuals for a flat fee, portfolio linked percentage and allow the individual to action the investment advice through any medium. If the investment is routed through them then they charge a small fixed fee plus disclose the amount of commissions they generate from these investments to the customer.

This move from SEBI will certainly help bring out service quality differentiator in the some what disorganized nature of operation of Mutual Fund Agents and Distributors. Though, for some time the Mutual fund investor will have to suffer from a service vacuum caused by this SEBI decision and will have to wait for Mutual Fund Agents and Distributors to recover from this shock and re-invent their service offerings.

Impact on Mutual Fund Asset Management Companies (AMC)

Mutual Fund Asset Management Companies are also worried that this move will force Mutual Fund Agents and Distributors to venture into selling other financial products such as Stock Broking, Insurance, ULIP and Post Office Savings, avoiding Mutual Funds .This will affect their expansion plans in Tier 2 and Tier 3 towns in India.

The challenge posed by the expanding Insurance market and aggressive and often mis-selling of ULIPs and other Insurance products to the same group of Investors by Insurance Agents is also haunting these Mutual Fund Asset Management Companies.

They are also particularly worried of additional charges that might be levied on them by banks in case the investment cheque given by the investor bounces. till now the Mutual Fund Agents and Distributors were the personal connect between them and the investors.

Further, the pressure from Mutual Fund Agents and Distributors are building up on these AMCs and The Association of Mutual Funds in India (AMFI) to take a stand on this issue. It will be interesting to see how things turn out in next few days, but for now the retail investors can rejoice.

PAN may not be mandatory for Mutual Fund SIP

Another important decision that can help investors who wanted to avail the benefits of investing in Mutual funds but could not due to mandatory PAN requirement. Two years back, PAN number was made mandatory for all Mutual Funds investments. PAN was introduced under the Prevention of Anti-Money Laundering Act (PMLA) as a Know Your Customer (KYC) norm.

Now,the government is set to exempt an annual investment of Rs 50,000 or less by investors in units of mutual funds from the requirement of submitting details of their permanent account number (PAN) at the time of investment.

However this relaxation from providing PAN details will only be applicable to investments through monthly systematic investment plans (SIPs). Since all SIPs transactions are routed through electronic transfers from the investor’s bank accounts, money laundering is not an issue.

This move will help in broaden the base of potential investors and can be particularly helpful in bringing retail investors participation in the Stock Market through Mutual Funds.