SEBI in a sweeping reform has done away with the practise of charging "Entry Load" on mutual fund investments , by the AMCs. Till now, the AMCs used to charge an entry load of 2.25%, on the money invested , from the investors. This fee was used to pay the sales commission to the dealers and sales agents involved in sales and distribution of mutual fund schemes. But, there was no transparency on the amount of commission being paid by the AMCs to the sales intermediaries out of this 2.25% entry load.
Now, SEBI has removed this entry load and as such AMCs (Asset Management Companies) can not charge any fee to the investor when he invests in a fund. This will ensure that your entire money is invested in the fund without any deduction. As far as commission to the sales intermediaries is concerned , SEBI has made a provision where the investor directly can decide the amount of commission he wishes to pay the sales agent. The AMC will henceforth, be not involved in this. The commission will directly be paid by the investor and the amount will be decided by the investor. This offers scope of saving in the commission fee as well. The investor will now have to pay 2 cheques, 1 to the AMC and one to the agent for his commission.
The various advantages of these reforms are
1. The mutual funds will have even lower cost structure now.
2. More transparency in the sales commission paid.
3. More powers to the retail investor in deciding the commission he wishes to pay to the advisor or agent.
There are possible drawbacks as well of this move
1. Since 90% of the mutual fund distribution is through the sales intermediaries, reduction in incentive/commission might deter them from selling/distributing mutual funds.
2. AMCs might start charging higher exit fees to recover the loss of revenue due to abolition of entry fee.