The debate over the expenses charged by a mutual fund to its investors could well be sorted out soon. If the proposition of the Association of Mutual Fund in India (Amfi) goes through, India would then witness a mechanism where investors could chose between different classes of units and also the applicable expenses or load to be payable. The association will be making this proposal to Securities Exchange Board of India (Sebi) this week.
For the past couple of months, a committee of Amfi has been working to replicate in the Indian context the ?share classes? structures used in US and Europe. These classes segregate the schemes of the mutual fund into different categories and investors can choose their preferred class and pay the applicable ?load? or expense.
A senior official from the committee said, ?Each class has its own characteristics. These are available in developed countries and we reckon that when introduced, share classes will give more option to the investors in choosing a payment structure. The differentiating factors with the classes would depend on the investment time horizon, amount of the investment, and investor?s personal preference.?
AP Kurian, chairman of Amfi, said, ?The committee is ready with the report and we shall submit it to Sebi this week. We hope that, a decision is passed soon so that, it can help more investors to enter in the mutual funds market in India .?
The debate over the nature of the ?load? structure has been on for a long time. It was in January 2008 that Sebi introduced a guideline directing mutual funds to not charge any entry load in case an investor approaches the fund directly and not through any broker. This caused a flutter amongst the financial products distribution industry. Then recently, the advisory commitee on mutual funds, constituted by Sebi, suggested that there could be two options.
One option would involve creating separate section in the investment form which would be jointly filled by both the investor and the distributor. Here, both the investor and the distributor would decide on the quantum of commission (subject to a limit) to be paid and both the parties would sign off. The asset management company would then pay the mentioned commission. The second option would require the investor to submit two different cheques, one towards the investment and the other towards the commission. And the asset management company would not deduct any load.
All these mechanisms have gathered criticism. In developed countries like the US and Europe, where there are several fund houses that offers Class A and Class B shares. However, many mutual funds also offer more than two classes of shares to their investors. And investors therefore have a choice.
A senior official form a leading AMC said, ?In some countries, each class will invest in the same pool or investment portfolio of securities and will have the same investment objectives and policies. But each class will have different shareholder services and distribution arrangements with different fees and expenses. However, we have to wait and see what the report suggests. But overall if the share classes will be introduced, it will be beneficial to the investors.?
The official further added that, in several cases, brokers are often paid commissions (entry load, exit load or a blend of both) plus trailing commissions. While in certain cases, the AMC either pays the brokers a direct commission, or they recover marketing expenses from the investors by charging the net asset values. With the variable loads, the mutual funds would also be able to allocate costs proportionately.