The Securities & Exchange Board of India?s (Sebi?s) latest move to do away with the initial issue fee for close-ended schemes of mutual funds (MFs) could not have come at a better time. Coming as it does on the heels of another Sebi decision, that of abolishing the entry load for direct and via-the-Internet investments, the regulator has signalled loud and clear that it wants MFs to be accessible and affordable as an investment vehicle for the common investor. Close-ended MFs had been charging an entry load as well as collecting issue fees and amortising them over the life of the fund. This was seen by Sebi as against the interests of the common investor, and hence the regulator has made it clear that all marketing and sales-related expenses of MFs should be met by the entry load itself. It is unfair to ask investors to bear an entry load and then also pay issue fees. For much too long, MFs have been in a cosy arrangement with some distributors whereby how energetically a scheme would be pushed depends on the amount of commission paid by those behind the particular MF. Therefore, more than the inherent strength of the scheme or fund house, it is the quantum of commission that would end up determining which scheme is marketed more aggressively than others by distributors. Sebi?s new move on close-ended schemes addresses this problem to a large extent.
It is true, however, that in the short run, the move may also hit earnest funds that align themselves with distributors and impart quality financial advice to investors. But then, the market is still in its early-to-mid stage expansion throes. Eventually, perhaps, there will emerge a regime where investors will realise that quality financial advice always comes at a price.
All in all, with this move, the important objective which has been achieved is that of making MFs cheaper for the investor. With the stockmarket yo-yoing dangerously every other day ? a rise or fall of 500 points has become routine in this market ? MFs will have to increasingly don the mantle of the small investor?s investment vehicle. Such investment vehicles cannot afford to be expensive, since that would defeat the very purpose MFs are meant to serve. The expertise of a fund manager is relatively reliable during times of extreme volatility, when wild swings can threaten to take away much of the hard-earned savings of the common investor, robbing him of lakhs in just a few trading sessions. Vehicles like MFs offer an affordable gateway for the common investor to the bourses, guarding his/her investments from market vagaries. To be sure, there will be some MFs that will cry foul and argue that the fees was an important means to funding justifiable marketing efforts that help schemes penetrate market segments that remain underserved and thus aloof from the country?s equity boom. An economy advancing in near double digits must not be held back by the sort of disaffection that attends the Sensex sarcasm that, unfortunately, tends to erupt in the larger populace as elections approach. Eventually, MFs will have to work out a way of reaching the underserved through the better use of technology and advertising. Besides, there are other distribution models available ? banks being a key one among them ? which MFs can leverage to reach remote areas. Sebi?s move is a good one.
