Mutual funds: Entry load might make a comeback as fund houses battle downturn

Sep 16 2013, 08:11 IST
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Mutual fund investors may again see a change in the way the industry charges them to keep themselves and the distribution community afloat. Mutual fund investors may again see a change in the way the industry charges them to keep themselves and the distribution community afloat.
SummaryThere's need to evolve better mechanisms to reward distributors and not burden new investors.

oil the distribution system.”

There are others who feel that in the current times the motto should be to over-communicate with the investor and the frequency of interaction with investors needs to go up.

“The outflow of folios suggest that investor confidence is very low and in these times the last mile communication is critical. Both manufacturers and distributors will have to interact with investor because if an investor leaves the industry it is tough to get him back,” said the CEO of another mutual fund adding that it is the time to be with the investor and reassure him of his investment decision.

Insiders say that the additional fee of 30 basis points will help the penetration of the mutual fund products beyond top cities and thereby is beneficial but they say that the majority of the benefit is to the large players who after crossing the threshold sales of 30 per cent beyond top 15 cities can claim the additional fee on their entire AUM.

“The distributors in the top cities are getting nothing and even the smaller mutual fund players are at a disadvantage,” said an industry insider who did not wish to be named. “While the entry load may not be the solution, a method needs to be framed that ensures everyone is nurtured.”

What it means for you?

Under the existing rules, even if you are an old investor, if the AMC manages a revenue of 30 per cent from cities beyond the top 15, you will see fund houses deducting an additional expense charge of 30 basis points from your investment and thus putting a burden upon you.

Consider this: If you invest Rs 1 lakh every year for 20 years and the investment grows at 10 per cent per annum. At an expense ratio of 2 per cent your total outgo stands at Rs 8.6 lakh over the 20 years but at an expense ratio of 2.3 per cent it will jump to Rs 9.9 lakh. Thus the burden of this additional expense ratio of 30 basis points is not a few thousands but Rs 1.3 lakh over the tenure of investment and you will be charged this even if your investment is an old one.

However, if Sebi had introduced an entry load of 1 per cent then that would have gone only on the investment amount and it won’t impact old investments. Further it would have gone to the

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