Would entry load be back in Sinha's regime?    Jan 31, 2011

The good old days of Mr. Bhave’s (Mr. C.B. Bhave present Chairman of SEBI) regime (where he incorporated revolutionary changes in order to safeguard investors’ interest), would soon end as Mr. Bhave’s three year term as the Chairman of Securities and Exchange Board of India (SEBI) comes to an end on February 17, 2011.


Mr. U.K. Sinha [Chairman of the Association of Mutual Funds in India as well as the Chairman and Managing Director of UTI Mutual Fund) now is set to become the new Chairman of the capital market regulator – SEBI, and will have term of 5 years unlike his predecessor. And knowing the fact that he’s the man from the mutual fund industry, now the industry (mutual fund industry) is now drawing up plans to make out a case to the new chief of SEBI for reviewing some of the past decisions, including the ban on entry load for investors, taken by the regulator in August 2009.



The AMFI wants to introduce differential load options whereby investors can choose between a “load option” and “no-load’ option”. The load option will work similar to the way funds were sold before the entry load ban. (Load funds charge an investor for the units purchased besides an initial sales fee. Investors will be required to pay an embedded charge of 2.25%, which will cover distributor commission).Moreover fund houses would provide “reward kicker” for investors opting for load options.



In the “no-load option” on the other hand, the funds will be sold in the same way as they are sold now. The investor will not pay any entry fee, and will compensate the distributor separately. Moreover, the AMFI board also wants to increase exit charges on “no-load funds” and some flexibility in spending the 2.5% charged to the fund as asset management charges.



In our opinion the entry load ban is an investor centric issue and the distributor centric AMFI may not be able to get it back by lobbying for it. Moreover, thanks to Mr. Bhave that investors’ today are much more aware about what’s in their merit – and lukewarm response to most New Fund Offers (NFOs) support that fact. In our opinion, instead of lobbying for something which is not good for the investors, the AMFI along with SEBI should chalk out ways to promote a fee-based model in the mutual fund industry which would be win-win proposition for both the investors’ and the distributors’.


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Feb 04, 2011

Trying to vie to get back to the old system may not a wise decision. However, in order that the distributors get back the interest into the mutual fund industry , we need to eventually educate the investors the need to pay a fee for the service rendered because the distributors also need to be responsible for their acts of suggesting funds to investors. Moreover by trying to introduce another set of rules like load and no load would in my opinion lead to more confusion. We need to think of terms from the present state of affairs and not think of taking it back to the old system. I hope that good thinking would dawn on Mr Sinha and that he does not get carried away by the demands of the distributors.
Feb 05, 2011

I am not agree to introduce entry load again , because agent would support only that funds that give him more benefits or commission rather mutual fund house to educate normal person and tell him the benefit of investment for the long time and help the person to fill up application forms and other form's So his trust gain. 
Feb 05, 2011

I agree with your opinion.  AMFI should more focus on advisory development measures.
Feb 07, 2011

In order to enable AMCs to increase the sale of their schemes I had suggested to AMFI and a few AMCs a Business Model which when implemented will be cost-effective and also in the interest of retail investors. If you permit I can send that Model to you.
The Distributors were providing only transactional services and hardly any advisory services. Provision of transactional services is the primary responsibility of AMCs and if they find it difficult to handle it they can entrust this task to their  Registrars like CAMS, KARVY, etc which will be able to provide these services at the fraction of the cost of entry load which was being charged to retail investors. The task of providing Adivisory Services should be left to the organizations like you and other individuals who are professionally qualified.
Feb 07, 2011

we need to understand for whom mutual fund are meant to be at least by definition. They were supposed to have come in existence for such investors who wanted to enjoy the benefits of stock market returns but did not had enough money to diversify their investment across stocks and sectors. Also neither they have the knowledge on how to pick up stock nor they can afford to buy such expertise. So buy investing just Rs5000/- and paying an entry load of 2.25% they could participate in market linked returns.

From a distributor's perspective - To have the kind of knowledge that helps an advisor to advise investments that will help investor achieve his objectives entails a lot of expenses, leave aside servicing cost. Retail investor can not afford to pay such fee because it would be much more than 2.25% and affluent investors will not pay in terms of % because they are not in habbit of paying financial advisory fee (they would like to sink their money with people like Shivraj Puri of citibank). So it was a good regime where all investors were paying 2.25% which was not an hefty charge but use to balance the advisors fee between retail and affluent clients. Then Sebi had brought in regime in between, where an investor had the freedom to directly invest with AMC without paying entry load or pay the load invest through a distributor. So those who did not require the services of a distributor had the luxury of investing directly without paying any charges.

Now with no load regime has Sebi tried to investigate who suffered the most. Certainly not the distributor because they had other products to support them most lucrative among them being the insurance. It was the retail investor and especially from smaller locations, for whom the mutual fund business is meant to be, because they cant afford to pay the hefty sum advisors are asking and for advisors its not a viable business. Ultimately advisors are not here to do charity and they too have to manage their business and family expenses. If you recall many big houses and ethical advisors had to close their shops in last three years leaving their investors in lurch and at the mercy of insurance advisors.

So my suggestion to Mr Sinha is bring back the previous regime of the two options where investor can decide to pay fee or invest directly with the AMC. Also Sebi can work on some disclosure norms and forms signed by advisor and investor for having understood the nature of investment and its risk profile etc.
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