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.