The Issue

In order to have a level playing field for mutual fund houses, the Securities and Exchange Board of India (SEBI) asked the fund houses to maintain two separate load accounts for paying its marketing and distribution expenses.

 

The regulator said (vide circular dated March 9, 2011) fund houses will have to segregate the load balances into two accounts of the schemes; one reflecting the balance as on July, 2009 and the other to reflect accretions since August, 2009.

 

Moreover now, fund houses will not be able to use more than one-third of the load balance (money collected through entry and exit loads) as on July 31, 2009 in any financial year, while accretions since August, 2009 would be fully used for paying marketing and distributor's commission in a single financial year.

What happened thus far?

Interestingly prior to the circular issued by SEBI, large fund houses were as such using huge historical load balances (amount collected under entry and exit loads) to pay hefty commissions to distributors. Thus the mutual fund industry really didn’t pain much due to the wound caused by SEBI’s entry load ban.

 

Load refers to an expense borne by an investor at the time of entry and exit from the mutual fund scheme.

 

Earlier (i.e. prior to August 1, 2009) mutual fund houses charged investors an entry load at the time of investing into a mutual fund scheme. But later (since August 1, 2009) entry loads were banned by SEBI, and only exit loads were allowed to exist.

But, what’s going to happen now?

The initiative now taken by SEBI would keep a check on the marketing and distribution expenses incurred by mutual fund houses as the amount at their disbursal will be limited. However large and popular fund houses would benefit from this move, due to huge load balances enjoyed by them.

 

This move by the capital market regulator would also help fuel competitiveness amongst mutual fund houses while garnering more Assets Under Management (AUMs), as their distribution budgets would now get narrowed down.

What should be happening? - Our View:

We think that while the move is intended to promote healthy competition amongst fund houses by having a restrain on marketing and distribution budgets; the exit load (still exists today!) which has been in fact the saviour for the mutual fund houses (as they penalise investors at the time of exit and make a buck for managing their marketing and distribution expenses), should be treated in a justifiable manner which is in the interest of investors.

 

In our opinion this back door way of allowing AMCs to pay out commissions to distributors is certainly imprudent. In fact by doing so, the investors who are showing long-term conviction towards a fund are suffering due to the fickle mindedness of the “exiting” investors. We believe that exit loads should be used by fund houses, to compensate investors who show their long-term conviction towards a fund – and that kind of accounting treatment should be brought in by the capital market regulator.

Add Comments