Dear Investor in mutual funds in India
In a path breaking decision, Securities Exchange Board of India (SEBI) has decided to do away with entry loads on mutual funds in India. A little back ground information about entry load is ideal here. Entry load is a load charged by the mutual funds to meet distribution and marketing costs. It ranges from zero (for debt/income funds) to 2.25% (for equity funds) and in some cases 3% also. This is taken out from the amount paid by the investor to the fund house through an accredited mutual fund advisor/distributor.
SEBI has recently decided that no mutual fund should charge any entry load to the investor. The actual date of implementation and other details will be know only after SEBI publishes a detailed circular.
Once it becomes applicable, investor has two choices.
a) invest directly with the mutual funds, or
b) go through a mutual fund advisor/distributor but pay for his services separately.
A wide variety of discussion is going on in various forums but mostly around the effect on mutual funds and distributors. Distributors are crying hoarse and their main grouse appears to be that:
1. investors need an advisor for pre-investment decision making and to handle operational issues relating to investment and post investment transactions
2. investors are not inerested to pay for the services rendered by the advisor and they will use the information availalbe in the public domain
3. Retail investment in mutual fund would suffer if there is no incentive to the advisor/distributor
4. Not all advisors are bad and the good advisors also would suffer in the process.
You can read some of the comments by the advisory community at the links provided below:
http://new.valueresearchonline.com/story/h2_storyview.asp?str=100428
http://blogsadmin.livemint.com/blogs/simple_equation/archive/2009/06/21/what-no-load-what-no-load.aspx
http://blogs.livemint.com/blogs/simple_equation/archive/2009/02/21/variable-load-structure-for-mutual-funds.aspx
We do not know the public reaction of mutual fund houses (Asset Management Companies) as yet.
In all these discussions, the media has not published the reaction of the investing public. Is it correct to assume from now on they will invest in mutal funds directly? Is it a fact that they do not wish to pay the advisor given an opportunity? Is it true that they do not think that there is any value addition by the advisor? Is it not true that they will pay for an advise if they feel that the advise is valuable? Will they now shift their relationship from the existing mutual fund advisor to a financial planner? Is it true that the investor would not to pay to a mutual fund advisor for the advise and services but willingly bear exhorbitant entry loads of insurance products?
As practicing financial planners we will have answers to these questions when we discuss with our clients and prospects in due course. In the meantime, we thought we will guage the mood of the investor on this topic and decided to invite the comments from the investing public. Feel free to write to us how you feel on this subject only as an investor.
Regards
Narendra Kondajji
Certified Financial Planner (CFP)