The proposal of SEBI to remove entry load (an initial charge on the fund) on direct MF investments is good news for retail investors. This facility would be available for investors who apply directly to the asset management company (AMC) either through the Internet or by visiting the premises of the fund house without involving the services of agents.
This move is progressive as entry loads only reduce overall returns earned by mutual fund investors. The entry loads — which are charged at the time of investment — can range anywhere from 1%-2.25% of the investment amount depending upon the category of the scheme (See Table). So, for instance, an investor seeking to invest Rs 10,000 in an equity fund actually ends up paying Rs 225 as entry load, while the rest is invested.
Says Gaurav Mashruwala, a certified financial planner: “An investor who is equipped to make his/her own decision in choosing schemes and has time to visit mutual fund office directly will save a substantial amount. Eventually, it is a forward step towards free pricing, where the investor and the distributor agree on the load structure”.
Most mutual fund investors of the country today rely on the advice rendered by their agents to pick and choose the schemes to invest in. Those who are better off use the services of their financial advisors. However, the ones who can truly understand the industry and make their own decisions are only a handful. And it is probably this third category of investors who will benefit the most from this new proposal.
The no-front-load model was reportedly introduced for the first time by Vanguard, which decided to go ahead and sell mutual funds without the service of agents. In India, Quantum MF is following a similar model of selling mutual fund schemes. The fund accepts investments through the Internet and does not charge a front-end load to the investor.
Says Quantum MF chief investment officer Devendra Nevgi: “This is a welcome proposal and will benefit the investor if and when it comes through. Right now, we need more investment education so that more investors can actually take the decision of their investment in their hands than depend on other advisors and agents.”
Today, actively-managed funds charge loads on equity-oriented mutual fund schemes. Many mutual funds are ready to waive off the loads if investors are ready to invest more than Rs 10 lakh at a go. Thus, higher the investment, lower the fees.
Mr Nevgi sees a problem in this. Ideally, small investors invest around Rs 10,000 to 20,000 in mutual funds. But since their investments are small, they get charged the highest loads, he feels. If front end loads are removed, the investor will benefit in this regard as well.
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