The SEBI circular on abolishing of Entry Loads was released on 30th June, 2009.
Given below are the relevant parts of the circular and how it affects you.
1. SEBI has been taking various steps to empower the investors in mutual funds by way of more transparency in the loads borne by the investor so that the investor can take informed investment decisions. Towards this end, SEBI had earlier abolished initial issue expenses and mutual fund schemes were allowed to recover expenses connected with sales and distribution through entry load only. Further, investors making direct applications to the mutual funds were exempted from entry load.
2. In terms of existing arrangement, though the investor pays for the services rendered by the mutual fund distributors, distributors are remunerated by Asset Management Companies (AMCs) from loads deducted from the invested amounts or the redemption proceeds. SEBI (Mutual Funds) Regulations, 1996 also permit AMCs to charge the scheme (under the annual recurring expense) for marketing and selling expenses including distributor’s commission.”
What this means:
Your distributor has hitherto been receiving the Entry Load from your investments.
Your distributor would also receive added commission from the AMC, which the AMC paid out of its own pocket, to attract more investments towards a particular scheme. So the advice you were receiving may have been biased based on which AMC was offering a higher commission to generate investments towards its fund.
The circular goes on to say:
4. In order to empower the investors in deciding the commission paid to distributors in accordance with the level of service received, to bring about more transparency in payment of commissions and to incentivise long term investment, it has been decided that:
a) There shall be no entry load for all mutual fund schemes.”
What this means:
Entry Load will no longer be deducted from your investments and paid to your distributor. This also means that your distributor will no longer benefit from churning your portfolio and earning Entry Load every time you invested in a new fund / scheme.
The circular continues:
b) The scheme application forms shall carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.”
What this means:
You can now decide how much your distributor’s services are worth to you. You can decide how much to reimburse your distributor for the service, especially for the quality of advice you receive. This also means that now when you invest through your distributor, you may write 2 cheques: 1 for your investment, and 1 to pay for your distributor’s services.
The circular says:
d) The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.”
What this means:
Your distributor will now disclose a chart, or table, stating what commission is earned from what AMC for investments into specific mutual fund schemes, but what this also means is that if an AMC decides to give your distributor a certain percentage or amount for generating above a certain level of AUM in a specified time period, for the AMC as a whole, regardless of which scheme the AUM goes into, this may not need to be disclosed.
For example: if AMC X, has a scheme Y, the AMC can tell the distributor ‘Generate AUM into my scheme Y, and I will pay you additional commission myself’. In this case, the information will be disclosed to you.
However, if AMC X has many schemes Y, V, W and Z, the AMC can tell the distributor ‘Generate AUM for me – for any scheme – no 1 scheme in particular, and I will pay you additional commission myself.’ In this case, there need not be any disclosure.
The circular also states the timelines for when this rule will be activated:
Applicability
5. This circular shall be applicable for
a. Investments in mutual fund schemes (including additional purchases and switch-in to a scheme from other schemes) with effect from August 1, 2009;
b. Redemptions from mutual fund schemes (including switch-out from other schemes) with effect from August 1, 2009;
c. New mutual fund schemes launched on and after August 1, 2009; and
d. Systematic Investment Plans (SIP) registered on or after August 1, 2009.”
What this means:
Your existing SIPs / STPs / Switch instructions will carry on as before, until 1st August, 2009. Entry Load will continue to apply to these investments. If you have started an SIP / STP, for the remainder of your investment period, Entry Load will be applicable.
Any fresh SIPs / STPs / Switch instructions and any new lump sum investments in mutual funds that are begun after 1st August, 2009 will fall under the new SEBI rule and there will be no Entry Load on them.
Any redemptions undertaken before 1st August, 2009 will not fall under this rule.
The rule will be applicable to all redemptions carried out after 1st August, 2009.
This also means that unscrupulous distributors may try to churn your portfolio as much as possible before 1st August, 2009.
What can you now expect from PersonalFN?
PersonalFN will continue with Business As Usual. We have no additional commission arrangements with any AMCs. We will continue to provide you with unbiased advice and honest recommendations.
We have been offering Financial Planning and Investment Planning services and will very shortly be introducing a fee structure for transacting your investments. Every such endeavour is to ensure that you are recommended only what is in your interest.
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