There is no doubt that the Indian mutual fund industry is reeling under pressures of redemption and loss of folios. According to the mutual fund industry body - the Association of Mutual Funds in India (AMFI) the mutual fund industry lost 7.8 lakh folios or 1.7% for the year ended March 2012. Some of the factors responsible for this, were the lacklustre performance of the Indian equity markets (markets corrected by a good 10% for the year 2011-12), coupled with low distributor support and abundance of high-yield debt instruments which in turn prompted the retail investors to redeem their money from mutual funds. Even SIPs were withdrawn by the retail investors due to the shoddy performance of the equity markets.

However, the above events and the subsequent downtrend in the mutual fund industry gave a platform to the AMFI and Independent Financial Advisors (IFAs) to raise their concerns and urge SEBI to tweak some regulations pertaining to the Indian mutual fund industry.

In a meeting between the SEBI and IFAs held last week, the IFAs expressed concerns over the current state of the domestic asset management industry, whose growth has stagnated in the last three years, partly because of bearish markets and distributor apathy towards mutual fund products after the ban on entry load - the initial fee that MFs charged investors to pay distributors. The key demands which the IFAs put forth to SEBI for consideration are revival of entry load and allowing fund houses to revive the practice of providing 'indicative yields' while floating fixed maturity plans.

Some of the other demands put forth by the IFAs were:
 

• Higher pay-out to distributors to widen the reach of mutual funds beyond 'top-20' cities
   
• A standard 'minimum investment limit' while launching equity NFOs
   
• A standard (or common) application format across mutual fund industry, which will further simplify the investor admission process
   
• Instruct fund houses to state the category of fund in the 'scheme title' itself.



 

Despite all this, it seems that SEBI is reluctant to bring back the entry load in its original format.

Impact of such an initiative on investors…
Investors should closely watch the developments taking place, as roll back of the entry load in its original format may again increase mis-selling as distributors may resort to push those mutual fund schemes which will fetch them hefty commissions.

Our view:
We believe that though there will be pressures on the SEBI to revive the mutual fund industry, it should not roll back the entry load, at least not in its original form wherein the distributors would resort to selling mutual funds based on commissions and not on the requirement of the investors. Instead, in order to inculcate the habit of long term investing, increasing of trail commissions can be considered as a better option. Increasing trail commission will also preclude distributors from churning investors’ portfolio and thus reduce mis-selling to a certain extent.

 

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pcooper@thearctn.org Jun 17, 2012 Read. Read. Read.Read at least 2 books on investing and one or two on Mutual; Funds. This will give you the right start. You don't have to be an expert. But, don't go into this with limited knowledge. It will cost you a lot.Stay away from books that promise quick riches. Was this answer helpful?

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