Tomorrows FSDC meet to weigh reviving mutual fund entry load

Written by Arun S | New Delhi | Updated: Feb 3 2014, 06:45am hrs
FSDCThe finance ministry and financial sector regulators are considering a calibrated re-introduction of entry load on investors in mutual funds. Reuters
The finance ministry and financial sector regulators are considering a calibrated re-introduction of entry load on investors in mutual funds.

The levy was abolished in 2009 by Sebi amid allegations of distributors resorting to mis-selling of products. The matter will be discussed at the Financial Stability and Development Council (FSDC) meeting on February 4, ministry sources said.

The rethink is in the wake of a large section of investors continuing to be wary of investing in stocks and the realisation that 11% growth in the asset under management of the MF industry in 2013 to Rs 8.78 lakh crore was below its potential. The MF industrys asset base had shrunk in 2010 and 2011.

"With the economy not doing well, people have fallen back on traditional investment options such as gold and property rather than choosing the innovative route of equities. (Financial sector) Regulators will now have to look at ways to increase investor participation in the equity markets. It is this context the regulators will consider the proposal to reintroduce entry load in a calibrated way and boost the mutual fund sector," a ministry official said.

Moreover, sources added, the ministry is of the view that the public needs to be made more aware of mutual fund products. According to the ministry, mutual fund is a product that is 'sold' rather than 'bought' and, therefore, the distributors need to be adequately incentivised.

The sources said during informal discussions it was learnt that the Sebi is also not totally against lifting the ban on entry load, adding the regulator is expected to evaluate the merits of such a move in its forthcoming board meeting.

Prior to the abolition of entry load by Sebi in 2009, investors had to shell out up to 2.25% to the mutual fund houses as entry load. The entry load charge was, in turn, passed on as commission to the distributors to incentivise them to sell more mutual funds.

The Sebi ban on entry load followed allegations that agents, in a bid to earn maximum commission, resorted to mis-selling products to investors and pressuring investors to buy and sell frequently (every time an investor churned his/her portfolio, an entry load of up to 2.25% was charged).

The ban on entry load had forced mutual fund companies to dip into their own accounts to pay distributors. It also affected the launch of equity new fund offerings.

Consolidated net losses of 15 of the bottom-ranked AMCs (AUM-wise) increased from Rs 144 crore in FY12 to Rs 161 crore in FY13, with 10 of them registering losses.

To expand the reach of mutual funds and, "bring in long-term money from smaller towns", Sebi in 2012 permitted AMCs to charge extra expense fee (an additional total expense ratio can be charged of up to 30 bps or 0.3% on daily net assets of the scheme') if the new inflows from beyond the top 15 cities are at least 30% of gross new inflows in the scheme. Industry sources said this move also did not help the sector much as the majority of sales are in top 15 cities.

Trackers like Dhirendra Kumar, CEO, Value Research, have a different take.

He said: "When entry load was allowed, mis-selling and churning of portfolio were rampant. Customers were taken for a ride. For the industry, the bigger problem is the ability of investors to bring in funds without any intermediary. A better option (to increase penetration of mutual fund) is to channelise provident fund/retirement savings into make mutual funds with a rider that the investor cannot pull out till retirement."