SEBI proposes to cut Mutual Fund costs

I have lately been quite impressed with SEBI (India’s securities market regulator) lately. The initiatives may not necessarily be in the right direction (for instance on corp bonds) but is certainly helping improve transparency in Indian securities markets.

They have started sharing/publishing data on segments of markets (which were otherwise unknown for instance on corporate bonds, venture capital), are sharing a lot of committee reports. It is also setting up an institute for development of knowledge base in Indian securities markets.

Now, the latest initiative is to attempt to cut down costs paid by investors investing in Mutual Funds (MF). The proposal states:

Keeping in view the interest of the investors SEBI is now considering giving a waiver in entry load for direct applications received by the AMCs i.e. applications received through internet, submitted to AMC or collection centre/ Investor Service Centre that are not routed through any distributor/agent/broker.

What is entry load? Suppose you decide to invest in MF. Say the price (in Mutual fund jargon it is called Net Asset Value or NAV) of one mutual fund unit is Rs 10. And the entry load is 1% then you would have to pay Rs 10.10 for one unit of Mutual Fund. See this to understand how much each MF equity scheme charges as front load. Most charge 2.25% so you end up paying Rs 10.225/- per unit.

This 10 paisa (multiplied by no of units you have purchased) is then kept in a seperate account and is used for meeting selling and distribution expenses. Or in a nut-shell this money goes to your broker. 

Now as we know, brokers are making more money than the mutual funds themselves. So it means most MFs are using brokers as the way to sell their schemes.

Now, as you would realise, as an investor you end up paying more, get lesser units and are on the loosing side. But then what should even MFs do? Most prefer to ride on the existing distribution system and sell via brokers.

Ajit Dayal of Quantum MF tried to sell MFs and cutting down on brokerage but could not win against brokers. No broker was interested in pushing his product. Now he could have given in and agreed to broker’s conditions. But he took them on and is selling the Mutual Funds via internet and word of mouth. But as distributors are very powerful (have you ever been recommended Quantum AMC) the equity fund run by AMC continues to struggle.

This initiative from SEBI is a welcome one. It would not only push down the costs of the Indian MF industry (and this would mean more returns in the hand of investor) but it would also provide more encouragement and support to likes of Ajit Dayal.

SEBI has invited suggestions/comments  on its proposal. I hope it receives support. It would have been good if SEBI actually published a report as well focusing on distribution costs. It would just help build better and stronger comments on its proposal.

Update 1: Reports from ET, BS.

Update 2: ET supports the move in its edit.

Update 3: Ajay Shah points to couple of articles and his views on the SEBI move. His view is that it is a great move but is a pretty small one and would not challenge the distributor driven model. In particular, read this article from Ajit Dayal in IE. He pours his heart out over the state of MF industry.

Dhirendra Kumar of Value Research (a MF rating agency) supports the move as well. His view is distributors are already in a state of panic. Great stuff.

BS (28 Aug., 2007) reports there is a mixed response towards the SEBI move. BS (29 Aug., 2007) has an edit piece on the same.

Update 4: In BS (30 Aug., 2007), there is a story that post SEBI move, MFs have started to expand their branches. As internet is yet to penetrate, MFs are expanding branches to penetrate investors. 🙂

Update 5: ET (3 Sep, 2007) reports that MF managers are split over the issue. They say with entry load waiver, the advisors/distributors of fin products might push insurance schemes ahead of MF schemes, as former offers more incentives to them.

Well, insurance is a financial products designed to sageguard oneself or his products/business from any mishap. Whereas MFs are supposed to help people gain some returns from parting with their savings now for some returns on the savings later. So they are apples and oranges really. The objectives are different. In the end, both might help in case of some mishap but MF may/may not give returns and insurance gives some benefit only if there is a mishap.

So, if a distributor recommends insurance ahead of MF, the industry people are instead saying the entire distribution set-up needs a relook.

Update 6: Ajay Shah points to this excellent article from Gautam Chikermane on the MF-distributor nexus.

Update 7:ET (17 Sep., 2007) reports the relationship managers in Banks (they distribute the mutual funds for banks) are feeling the heat.

Update 8: Ajit Dayal (Quantum AMC) and Nirmal Jain (Indiainfoline CMD) debate whether entry loads should be there.

Update 9: ( ET 24 Sep 07) Want a ticket for Twenty20 Indo-Pak final? You should have been a MF distributor.


9 Responses to “SEBI proposes to cut Mutual Fund costs”

  1. Vasanth Says:

    What happens to MF’s purchased with In this case is iCICIDirect considered distributor? Or since it is done over interent there won’t be entry load?


  2. Amol Agrawal Says:

    As of now, provided the scheme charges an entry load, whichever way you apply there in an entry load. So, even with one is charged an entry load. is a kind of distributor and any application via it would invite a load.
    However, if this proposal goes through, on downloading a form from internet, filling it and sending it by yourself, there would not be an entry load.

    As, it is just a draft proposal, the technicalities would only be known after it is becomes a regulation.

  3. SEBI initiates fast track issuance « Mostly Economics Says:

    […] SEBI is getting really active on various securities market activities. I had mentioned this earlier as […]

  4. Assorted Links « Mostly Economics Says:

    […] also has a post on the recent SEBI move to do away with entry load. You might also like to see my post on the same. I have updated it. […]

  5. Assorted Links « Mostly Economics Says:

    […] As we debate on the efficacy of entry load charged by Mutual Funds, MFs are tinkering with their exit […]

  6. Bhupesh Says:

    SEBI should also mandate any exit load collected should get part of scheme corpus, if there any disadvantage in investor switching quite often on market movement, it is the remaining customer who suffer not the mutual fund house.

  7. JV Says:

    Informative post. I agree if entry load is remove , the difference on returns on long term will be very significant one. I also admire the investment philosophy of Ajit Dayal and his no-entry-load mutual funds. I am planning to invest some sum in his mf.

  8. SEBI waives entry load of mutual funds « Mostly Economics Says:

    […] SEBI waives entry load of mutual funds In what is being called as a new year gift, SEBI waives the entry load for mutual funds in case of direct applications. There has been huge commentary on the issue right since the time SEBI floated the idea. I covered much of it here. […]

  9. Rakesh Says:

    The decession of Sebi chairman is good for the person who knows it very well,but no body are thinking that how badly its effect the investors insurance business the commisiion rate is 10% to 35% where the risk which is associated with this investment is moderate and low, but agents are getting comission every year by one time of efforts but where the risk is very high and one should need a sound and expertise knowledge for right investment will be avoided. Now every body will follow his/her freinds or relatives portfolio or suggestion without thinking there needs and risk appetite. the things which can be encuragable are avoiding or neglecting.

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