Rift wide open on MF entry load waiver plan

Written by Sai Prasan | Updated: Aug 31 2007, 04:35am hrs
The bouquets and brickbats are pouring in to market regulator Securities and Exchange Board of India (Sebi)'s proposal to do away with the entry load on mutual fund investments. While investors and some fund houses are supporting the regulator's move to waive the entry load on equity schemes, distributors and the mutual fund industry body are crying foul.

It's been quite sometime that Sebi has been expressing concern over the growing trend of churning and mis-selling being encouraged by a section of distributors just to earn commissions from investors. The regulator held detailed deliberations before floating the proposal. Investors have also been making allegations that distributors mislead retail investors and encourage them to buy those schemes where they get more commissions.

M Damodaran, chairman, Sebi, has cautioned time and again that there are certain issues involved with the distribution community that needs to be addressed for the long- term viable growth of the industry. In line with this cautious note, Sebi has proposed that applications received through internet, submitted directly to fund houses, collection centres and investors' service centre, that are not routed through any distributor or agent or broker, may be given waiver in the entry load.

Currently, all investors, irrespective of the mode of entry, are required to pay the entry load. The MF industry generally utilises the entry load corpus for paying the commission of an agent or distributor. The fund houses charge on an average 2% entry load which constitute a cumulative corpus of Rs 600 crore annually.

Investors and some fund houses like Quantum Mutual Fund have whole-heartedly supported the regulator's move to waive the entry load on equity schemes. They feel that the investor's hard earned money invested in different equity schemes will provide a better return in case the entry load is waived in direct investment.

Endorsing the regulator's proposal, Devendra Nevgi, CEO & CIO, Quantum Mutual Fund, said the direct-to-investor (DTI) model will help investors in reducing the cost which will add returns to unit-holders. "The DTI model provides an interface to investors to interact directly with the rank and file of the fund houses. It will help in checking mis-selling of schemes to investors." The move will boost the confidence of investors in the overall market operations and MF industry, he pointed out.

In sharp contrast to this, the distributors' lobby as well as the MF industry body, do not buy this theory. They feel that the domestic industry is not ripe enough for the introduction of the DTI model due to several reasons.

The DTI model adopted by US-based Vanguard is successful because the entity is involved in the passive and Exchange Traded Fund (ETF) management. Moreover, the US market is fully developed and investors are well informed about financial products.

On the contrary, the penetration of MF industry and the level of financial literacy among domestic investors is still very poor in India. The MF penetration is 60% in the US against 1.6% in India out of the total investors base.

In this backdrop, the Association of Mutual Funds in India (Amfi) is preparing a note on the regulator's proposal. AP Kurian, chairman, Amfi, said that the industry body will submit its point of view within the stipulated time (September 12) given by Sebi for the public comments on this subject.

He said that the new proposal will badly hit the distribution community. Their existence is necessary as they propel the growth of the overall industry, Kurian added.

"They are instrumental in creating awareness among investors towards mutual funds. Their role is important because MF schemes are not bought, they are sold in the domestic market, he said.

In line with Kurian, Ravi Sharma, CEO, Birla Sun Life Distribution Company, said the new proposal is likely to choke the revenue flow of distributors. They may stop providing free advisory services and start charging for the same from investors.

In defence of the entry load, Sharma said the arguments of Vanguard in not charging any entry load does not hold much water in Indian context because they are involved in passive fund management. Moreover, the domestic industry too does not charge any entry load for big ticket investments, he added.

Striking a balancing note, Sameer Kamdaar, national head, Mutual Funds, Mata Securities, said both the direct-to-investor and distribution model can go hand in hand. Market forces can determine the investors choice of buying or selling schemes. The investors, buying directly or otherwise, should have the liberty to do so according to their will instead of forcing any particular model on them.

Further, Kamdaar said it appears that the regulator has offered the new proposal to check churning of MF schemes. The problem of the churning can be tackled only with effective legislation, he added.

The regulator needs to do a balancing act in this regard, say experts. On one hand, it needs to address the problem of churning by encouraging investors to invest directly into the schemes and on the other hand it must look into the genuine concerns of the MF industry, in general, and distributors, in particular.