Friday, August 7, 2009


SEBI is an institution which aims to act as watchdog to protect the interest of common investors in the equity markets. With this aim in mind, SEBI sometime back mandated that all AMCs do away with collecting entry fee to investors who wishes to invest in mutual funds. This is a revolutionary decision since it makes the mutual funds the best investment structure by a long distance. Now the investors will not be charged any entry fee and the entire money invested will be accounted for in the number of units. This will push up the effective returns that the investor will get.

But, all is not well with this step. There are certain concerns as of now which needs to be addressed.

1. No entry fee means lesser people willing to sell- The abolition of the entry fee has led to a dramatic fall in the number of distributors who are willing to distribute or sell MFs. Many banks who earlier used to aggressively sell MFs to their clientele have completely stopped or have gone slow on it since selling them does not make them money anymore. This is likely to impact the retail investor in the end since it will be difficult for him to locate point of sale of MFs now . The lower the distribution , lower would be the accessibility of this product which already has abysmal penetration of less than 3 % of the population in India.

2. Increase in Exit loads - While SEBI has mandated that entry loads be done away with, it has allowed AMCS to charge exit load of 1% . Now, most of the equity based funds have hiked their exit loads from 0% - 0.5% to 1%.

3. Increase in the holding period of MFs for no exit load - Earlier the average holding period for equity based MFs where no exit load was charged was about 6 months. Now the same has been increased to 2 years in most of the funds. This means that if an investor wishes to avoid paying exit load, then he may have to stay invested for a longer period of time.

4. The investor may be forced to pay more than 2.25% - With the abolition of fixed entry fee, the SEBI has allowed that an agent or advisor can charge his/her commission separately from the investor. This has opened up a small window where an agent might try and extract more commission out of an investor. This will then defeat the whole purpose of the abolition of the entry fee.

There are few glitches which need to be ironed out before things can be really streamlined for the AMC, the distributor/agents and the common investor.

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