No entry loads hurting sales of mutual funds

by Manshu on February 25, 2010

in Mutual Funds

SEBI (the market regulator in India) banned mutual fund entry loads last August, and I read an interesting piece in WSJ about its possible ramifications today.

Mutual Fund entry loads were expressed as a percentage, and were deducted from the money you invested in the mutual fund. It was used to pay commission to the distributor (mutual fund agent, insurance agent, broker, financial planner, bank agents etc.) who sold you the fund.

Example: Entry load of a fund is 2% and you invest 10,000 in it, – 200 bucks were deducted and given to the distributor.

SEBI put an end to it last August stating that if intermediaries want to charge you a commission (which is what this really was) – they should charge it directly to you instead of having that deducted from the amount you invested.

This makes the whole thing a lot more transparent as people understand that they are paying a certain percentage to the guy who is selling them this stuff, as opposed to some load that they were paying to the mutual fund.

This was a significant step as it takes away the big incentive from distributors who were pushing such funds. Now, they had to ask a fee for their advice from the investors, which didn’t go down too well with them. It also makes the investors a lot more aware of where their money is actually going.

The WSJ reports that this had very significant impact on mutual fund sales:

Unwilling to ask for money directly from investors, financial advisers, banks and even the post office have stopped pushing most mutual funds. All told, more than one million advisers have stopped peddling the funds for now. “The distributors are angry” about having to ask for fees, so they are not pushing mutual funds, said A.P. Kurian, chairman of the Association of Mutual Funds in India, an industry group. “This changeover is certainly affecting us.”

While I am not too convinced about the 1 million number; I think there has been a huge impact to the industry in terms of pushing such funds.

The story goes on to state that in a lot of cases the money that was meant to be invested in mutual funds finds its way into insurance schemes and fixed deposit schemes. It’s not that people find insurance more attractive, just that insurance has not made the same switch yet, and probably distributors who were pushing mutual funds earlier are now busy pushing insurance products. I think the regulators should make insurance companies to follow this model as well.

I think this move is good for investors because it makes costs transparent to them, and more importantly takes away a big incentive from agents who weren’t always keeping investor’s best interests in their mind. In fact, if you go around reading forums / comments and asking people about mutual funds they own, – you will be surprised to hear how many of them have in excess of 30 funds! I am sure some serious hard – selling was involved in such cases.

If retail interest is waning in mutual funds, then funds need to come up with lower cost funds, which perform over the long run, not lament about a positive change.

This is a great regulation by SEBI and I hope it doesn’t go away because of lobbying or any other pressure. I’d be interested to hear any reader stories if this change has personally affected you, so please do leave a comment.

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{ 2 comments… read them below or add one }

Indian Thoughts February 25, 2010 at 10:03 pm

you know what, it’s just not removing of entry loads. It’s also the hassle fund house create for end investors that might hurt MFs in long term.
I faced this issue twice in 4 days and none of the fund house even obliged to reply to my complaint mail. AMFI hardly bothers to give any complaint cell. It’s gloomy.

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Manshu February 26, 2010 at 7:44 am

The most common emails I get is from people who have not got acknowledgment on their mutual funds and money from their fixed deposit. They want me to help them out, but there isn’t really much I can do. I guess they first go to the guys who sell them this stuff but when nothing happens start searching online to see if they can get any help.

The complaint cell needs to be beefed up for their own good in the long run.

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