The first of these two changes is a major one. Readers of financial publications must have come across this in the past week or so. As per this new regulation, Sebi has abolished the entry load on mutual fund investments. The entry load, which is essentially an amount deducted from your investments to pay a commission to the fund distributor, is one of the premium sources of income for fund distribution businesses. The financial viability of many such small and individual-owned businesses is said to come under threat because of this abolishment. The distributors will now be paid directly by fund companies, from their pockets. Apart from that, they might earn whatever fees they are able to negotiate with their investor clients for their services and advices.
The second major change is that the government will drop the PAN card from the Know Your Customer (KYC) requirements for small investments made through SIPs. According to a statement from the AMFI (the fund industrys association) chairman AP Kurian, the KYC requirements for SIP investments totalling less than Rs 50,000 a year need not include the investor having a PAN card. KYC requirements in mutual fund investments (as in other types of transactions) arise from the 1999 law called Prevention of Money Laundering Bill. The basic idea behind this bill was that no one should be able to pass large sums of money through the financial system anonymously. Every entity was made responsible for positively knowing and verifying the identity of its customers.
In 2007, this law was eventually applied to mutual fund investments, which boiled down to the simple fact that one needed a PAN card to invest in funds. KYC has other requirements too, but the PAN card requirement was what took most small investors away from funds. There are a huge number of people who earn around Rs 50,000 a month and could be saving Rs 500 or a little more every month. However, it simply isnt worthwhile or even practical for them to get a PAN card made. These people have no money to launder and should never be subjected to such provisions. The freeing of PAN requirement at the bottom of the pyramid will help investing in funds become easier.
Coming back to the first regulation, the entry load abolishment has come as a huge shock to the industry, but as is obvious, Sebi has undertaken it in the interest of investors. The business spectrum involving fund distributors and financial advisors has sincere players, but also a fair number of manipulative ones. These crooked players used to actively pushing funds to earn via the entry load will no doubt find other means of manipulating their clients. But it is the sincere ones that will suffer. Hopefully, the fund companies will make selling funds worth their while.
Either way, the fact remains that these two changes will be largely appreciated by fund investors and that is what will be a pat of Sebis back.
The author is CEO, Value Research