End of Entry Load Era in Mutual Fund : Interesting Aspects

End of Entry Load Era in Mutual Fund

Mutual fund companies, with their fine printed term & conditions, were getting a good business without even bothering their clients about the charges , they were going to charge by way of entry loads. Mutual Funds Investors were ignorant of the entry load as the agents and distributors seldom discussed it with the Investor.

With a view to make the whole process investor friendly, SEBI vide its circular http://www.sebi.gov.in/circulars/2009/imd_cir_3009.pdf,  abolished entry load for investing in mutual funds.

In a quick time, fund houses, after having feeling the heat of cash drainage without the entry load, showed the unity in putting pressure on SEBI to re-think or to do some thing in their favour.

SEBI had a dual role to play in this scenario. First one of playing a role of “guardian of small investors” & second role was of “survival kit for the mutual fund companies”. Finally after all the representations, SEBI agreed to the fact that it can not upset the transparent regime, brought by its “No Entry Load” directive, but on the same hand, it can not allow the mutual fund industry to lurch in a cash crunch condition.

Outcome : SEBI vide its circular http://www.sebi.gov.in/circulars/2010/cir-mf182010.pdf asserted that the mutual fund companies can charge the customers “Fund Management Fee” separately. SEBI’s new guidelines stipulates that investors directly make payments to distributors instead of MF companies deducting it from the investment made in any scheme.

This move by SEBI brought immense competition among the  MF companies as they have to openly quote the fees to be charged for any transaction.

Impact on Mutual Fund Agents and Distributors

Agents and Distributors use to sell Mutual Fund schemes to investors who were required to pay an entry load. This load was around 2.25% of the money invested. Asset Management Company used this charge towards paying the brokerage or commission to the distributor.

With zero entry load, now the Mutual Funds agents and distributors will have to find a new revenue model to operate. Many public and private sector banks were also providing wealth management and investment advisory services to their customers by primarily distributing Mutual Funds and Insurance products as part of there fee-based business. The revenue from these services were coming by way of sourcing commissions from AMCs and Insurance Companies.

Most likely, they will have now have to re-invent their revenue models and start to negotiate a service fee or a commission directly with the Mutual fund investors similar to the brokerage and commissions charged in stock broking and real estate transactions.

Impact on Mutual Fund Investors

This whole exercise has brought a thorough transparency, fierce competition & above all more clarity in the investor’s mind at the time of opting for any mutual fund investment. The transparency factor that this decision brings will be beneficial to the Mutual fund investors in the long run.