SEBI has initiated the move to allow investors be charged with a fee while they invest in Mutual Funds. Distributors can be charged Rs100 as transaction fee per subscription. Those who are first time investors need to pay Rs50 extra. For small investors, whose investments do not exceed more than Rs10000, no charges will be applicable. Although this move has brought some respite to distributors, it is still not clear as to what does the phrase “first time investor” means. This is leading to a lot of ambiguity when it comes to formulating as to how this move may seem profitable to investors and distributors. The Mutual Fund Industry is still in the dark with regards to this proposition and is seeking the help of SEBI to get these clarified. But with this proposal it is quite clear that, SEBI is trying to change its mindset about the role of distributors in the Mutual Fund industry. The earlier proposals that were formulated deregulated the role of the distributors whereas this initiative is a confidence booster among the distributors in the Mutual Fund Industry.
What does this mean to you as an investor?
With the abolishment of entry load, most distributors lost interest in selling MFs since they no longer gave them any benefit of carrying out the transaction. They thus, turned towards selling of Ulips or other traditional insurance policies, where they were benefitted by a high commission. This led to the loss in the market share of investors who have a low-mid income slab. With the advent of the transaction costs, the distributors are sure to make some money while your savings grows over the years. This move mainly helps in motivating those investors who reside in Tier II and Tier III cities in India.
Apart from the savings point, you as an investor, will be made aware of the various opportunities that you have available even if you are of a lower income group. The transaction fee will not exceed 1-1.5% of the total value of the transaction. Distributors will advise you the various avenues available for your savings to grow and allowing you to fulfill your KYC requirements with your particular distributor. Earlier a lot of first time investors found it quite difficult to comply with the KYC norms since there was no one to help them out.
Things you should be aware of:
In order to draw extra commission flows from your end, distributors might advise you to churn your portfolio frequently. Or provide you with solutions where he gets the opportunity to earn commission by structuring your portfolio in a way that can benefit your distributor. For example, if you want to invest Rs1lakh in mid caps, your distributor may entice you to invest Rs10000 in 10 different mid cap schemes, wherein he makes a commission of Rs 1350 extra. If a fund house in involved in such malpractices, things can get a little more complicated. Since it is the distributor on which the fund house depends, any mal practice carried out by the distributor will not be taken care of by the fund house. Therefore it is much safer if you opt for a distributor that is regulated directly by SEBI or any other independent body. As a prudent investor it is very important for you to analyze such tactics and be in a position to question the distributors change in investment decisions. It is very unlikely of you to require a home loan or a personal loan to fulfill your financial requirements if you have opted for the right distributor and are saving with a fund house that has its objectives matching with yours.