The Securities and Exchange Board of India’s (SEBI) decision to abolish entry load imposed on mutual fund schemes was viewed by many industry insiders as the best decision by the national regulatory authority in a long time. It was high time that mutual funds were given the authority and power they deserve. Instead of allowing middle men to misrepresent and benefit from profitable mutual fund schemes, the baton of power and decision making must be handed to mutual funds themselves, so as to decide incentives that can be awarded to their distributors. Although this change has been introduced by the SEBI quite recently, many investors have shown a negative approach by not adapting to this transcending change, and thereby, increasing speculations that the SEBI may strike an iron fist on such demeaning organizations. On the contrary, several financial organizations have warmly welcomed this change, viewing it from an investor’s point of view, implementing amendments in their policies accordingly.
While asset management companies have given their pricing power to distributors, it is not viewed as a healthy decision, as it may contribute to the debacle or failure of their business plans. On the other hand, larger investment houses have played a different move by lending their pricing powers to banks and other corporate houses, while distributors have been given the benefit of retail investors. This is because these houses have been vying their hopes on the reversal of policy on entry loads, which may transform the fate of these Indian fund houses, with equity and debt schemes of over Rs. 7 lakh crore.
While entry load may seem like technical investment jargon to an ordinary investor, it is nothing but the industry practice of transmitting or passing 2.25% of the money contributed by investors, in order to purchase mutual fund units as commissions to their distributors. Several AMCs or Asset Management Companies, dealing with mutual funds, have constantly complained that distributors no longer possess an interest to sell mutual funds to their investors. The Securities and Exchange Board of India has also made note of this decline in the number of assets and folios under management, seeking to benefit distributors, without burning a hole in the pocket of investors. Some consideration must also be given to the fact that there are several first-time retail investors who may be interested in making an investment in the market, but may fear its impending risks and hazards. It is not uncommon to fear the wipeout in their investments in case of a market crash. However, it is not always true, provided the investor has taken sound decisions. If not, borrowing debts like loan, home loan etc to fulfill one’s financial requirement may be required.
For such investors who haven’t entered the market at all, without some percentage of incentive, there is not practical or realistic means to increase the rate and growth of penetration of the market. With the sale of mutual funds affected in small villages and towns over the past couple of years, along with an increased concentration in bigger and affluent cities, the Securities and Exchange Board of India has made a sharp note on potential incentives that can be provided to distributors.
However, the road is not smooth in this aspect for the regulatory body of the country as it may encounter several issues like the mis-buying and mis-selling of products in this process. This can be stopped or hampered through continuous investor awareness and education, combined with the regulation of distributors and their practices in the country. Only then can mutual funds acquire the status that is long overdue to them. Meanwhile, as a prudent investor, it is mandatory for you to keep a track of your investments and ensure that you have the knowledge about all the charges that are being charged against your gains and against your fund account.