Few retail investors are aware why they are charged an entry load of 2-2.5% when they invest in a mutual fund. The money goes towards selling, distribution and marketing expenses of the asset management company (AMC) in whose fund the investor has put in his money. Naturally, this brings down the amount invested in the fund by investors, which is not a very exciting proposition for them.

Because entry loads have been a contentious issue, the Securities and Exchange Board of India (SEBI) recently passed an order saying that investors who approach fund houses directly will not be charged. The idea has been to improve direct access between fund houses and investors and to bring down the need for intermediaries or distributors, who are blamed for recommending funds that give them maximum commission. The result is a high level of churn of funds among investors, which is neither beneficial to the industry nor the investor.

Detractors of the distributor-led business model contend that the interest of the investor is never at their heart. ?There is bias selling no doubt, which is why New Fund Offerings (NFOs) are sold aggressively,? says Devendra Nevgi, CEO & chief investment officer, Quantum Mutual Fund, which has bucked the trend of using intermediaries.

The advantage of using this system is that entry load is eliminated. Also, investors feel more confident dealing with fund houses directly. Says Nevgi, ?Because informed fund managers are dealing with investors, they are able to advise them better. That may not be the case with agents, who may encourage investors to switch funds rapidly.?

Distribution of financial products is essentially done through banking channels, independent financial advisors, national and regional distributors in India. Though distribution through banking channels is fairly large at 30-35%, the role of others cannot be ignored. Independent financial advisors can be found everywhere, selling insurance, mutual funds and other products. They are easily accessible too and constitute the unorganised segment of the business. The proportion of independent financial advisors selling insurance is 35-40%. However, for mutual funds the number is slightly less at 20%.

Investors often complain that they are not happy with the system. A fee-based model, explains Vikrant Gugnani, CEO, Reliance Mutual Fund, is a way out where the investor could directly deal with the distributor, seeking advice from him for a fee. But again, this approach works well only for those who are fairly informed about financial matters. ?What do you do about people who are not very savvy?,? asks Mukul Gupta, CEO, Birla Sun Life Asset Management Company.

?It is not possible to do away with distributors. India is still at a stage in the lifecycle of the business where they are required. Penetration and awareness of financial services and products is not high enough in Tier II/III cities. This despite the fact that people do want to invest,? he says.

By some accounts, distributors are critical to AMCs because the latter are unable to take up the task on their own. ?We manufacture assets,? says Gugnani of Reliance Mutual Fund. ?Distribution is not something we can do.?

Asks a senior executive at a distribution house, ?Which business doesn?t involve the process of distribution?? He adds, ?Distributors get a 2% commission on selling mutual funds. Selling insurance is more profitable, which is why many distributors opt to sell insurance than mutual funds.?

The fallout of this, argue distributors, is that AMCs will suffer. ?It is not possible for AMCs to take up distribution because it is not their area of competence,? says Rajiv Deep Bajaj, MD, Bajaj Capital. ?The perception is that distributors are unorganised because they don?t have a common voice. But barring a few, I don?t think anybody indulges in malpractices,? he says. According to Lokesh Nathany, national head, distribution, wealth management & PMS, Almondz Global Securities,

SEBI?s move will strengthen the role of the distributor, going forward. ?The challenge now will be to move up the value chain and provide advice,? says Nathany. ?In other words, distributors will have to significantly add value to the service.? And some have already started working towards it.