No need to pay the 'Load' on Mutual Funds

New Delhi: As most of you must be aware, MFs usually charge an entry load of 2.25% when we invest in any of their equity schemes. This load is primarily used to pay the distributor’s commissions.

However, this has certain drawbacks, such as

1. The load is levied even if someone were to invest directly without going through a distributor.

2. An investor has to pay a fixed cost, irrespective of the quality of the service offered by the distributor.

Therefore, the SEBI is now thinking of doing away with this load in case someone invests directly [say through the internet or submitting the application at the MF’s office/ service center/collection center] without routing it through any distributor. This would save them 2.25% cost that they have been paying so far. Thus, for every Rs.100 invested, now the entire Rs.100 would become part of their corpus and earn returns as against Rs.97.75 earlier.

Predictably enough, there have been voices both ‘for’ and ‘against’ the proposal.

Cheers

Any change in policy, especially an important one like this, is bound to change the way the business is done. So what’s going to be the likely impact?

Prima facie the idea appears to be good for the investors.

• Now the quality of advice and service would become important.
PAGE_BREAK
• Different investors have different needs. Distributors will now be able to offer a range of transparent fee-based/commission-based services to their clients. Thus, the investors could now choose the type of services they desire and pay the fees accordingly.
• Fee-based advisory, where usually no personal interest of the advisor is involved in recommending any schemes, would gain prominence.
• Some smart investors may take advice from the distributor and then go ahead and invest on their own. So now the distributors will be at the mercy of the investors. Well, for a long time the investors have been taken for a ride. So I guess now they get the chance to make the distributors taste their own medicine. (It is a fact that certain unscrupulous distributors have, in the past, looked at their own interest rather than the investor’s and done some amount of mis-selling.)

However, there is a need for some caution too.

A vast majority of the investors still don’t understand the MFs quite well. Hence, a lot of misconceptions continue to plague the industry even after more than a decade since the MFs made a debut in India. For example Rs.10 NAV fund is assumed to be cheaper; investing just before dividend declaration; frequent churning of portfolio; blindly investing in the day’s top-performing funds; not sure of which option to choose – growth or dividend payout or dividend reinvestment; assuming that profit booking in MFs is same as that in shares; etc.

Also, as the number of MF companies and the schemes multiply, it is becoming increasingly difficult for an investor to choose the right funds.

Moreover, if the investment horizon is long (as is generally recommended for equity investments), this load actually works out to be a very nominal cost.

Therefore, if in the process of saving this small amount, an investor invested in a poor scheme, he would stand to lose much more than what he is trying to save. Isn’t that being ‘Penny Wise Pound Foolish’!

To learn something from the experience in US - both no-load and load funds have co-existed there (despite the earlier apprehension that load funds will become extinct with the introduction of no-load funds) and performed their role quite well in meeting the needs of the diverse kind of investors.

Concluding, therefore, one can say that the one-suit-made-to-fit-all-investors would soon be history. Now, broadly speaking,

• those who understand MFs and the markets very well so as to be able to take informed decisions and can conveniently make the investments, can take the direct route;
• those who are looking for the right advice can opt for the fee-based advisory services;
• while those who need advice, assistance in filling-up/depositing the forms, portfolio monitoring etc can opt for the normal commission-based services.

Some people prefer guided tours, while others love to explore the world by themselves. Now at least, even the MF investors will be able to make a similar choice.

- Sanjay Matai

The author is an investment advisor and promoter of wealtharchitects.in.