Mutual funds still charging entry fees on existing plans

Mutual funds still charging entry fees on existing plans
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First Published: Wed, Sep 23 2009. 09 20 PM IST
Updated: Wed, Sep 23 2009. 09 20 PM IST
Mumbai: Despite a ban on entry fees, several asset management companies are still charging those who invest through systematic investment plans (SIPs) in various mutual funds by utilizing a loophole in the market regulator’s instructions.
An SIP is a service option that allows investors to buy mutual fund shares on a regular schedule, usually through bank account deductions.
The Securities and Exchange Board of India (Sebi) banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August. However, according to the new rules, existing SIPs have to be terminated and restarted to avail of the benefit. Many fund houses have neglected to inform investors about this, and have together earned around Rs45 crore in August from such fees.
“I have not heard about the Sebi circular. Even my agent has not told me anything,” said Manjusha Bagal, a Thane, Maharashtra-based homemaker who has been investing Rs3,000 every month since July 2008 in an equity scheme of a leading fund house.
Sebi on Wednesday issued a 16-point code of conduct for mutual fund and asset management companies that asks them to “ensure that all investor related statutory communications”, including entry and exit fees, are conveyed to investors “reliably and in time”.
“We have not informed (investors). Why should we?” Sunil Subramaniam, head, sales and marketing, Sundaram BNP Paribas Asset Management Co. Ltd, which manages Rs14,023 crore in assets, said before the latest code of conduct was announced.
According to data from industry lobby group Association of Mutual Funds in India, equity funds saw inflows of Rs4,036 crore in August and industry estimates suggest that at least 50-60% of that amount came through investments in old SIPs. Funds would have, therefore, earned entry fees worth Rs45-50 crore at the rate of 2.25%. SIPs typically charge between 2% and 2.25% as entry load. The association only collects aggregate numbers, and does not break them down by investment categories.
“If the amount involved is big, people have already done it (re-registered). But smaller investors continue to pay,” said A.K. Narayan, president, Tamil Nadu Investors Association. “These anomalies will take at least 6-12 months to get corrected.”
Some distributors have even put in fee structures that make re-registering meaningless.
ICICIDirect.com has announced a transaction fee of Rs30 on all transactions below Rs8 lakh. It does not make sense for an investor to re-register an SIP below a sum of Rs1,400 as the transaction fee would cancel out savings from the zero entry load.
At fund house Reliance Capital Asset Management Ltd, which manages about one million SIP customers, the highest in India, existing SIP investors are yet to re-register their portfolios to avoid the entry load burden.
“Almost all of our SIP customers are continuing with their existing load structure,” said Sundeep Sikka, chief executive of the firm that manages assets worth Rs1.17 trillion and collects Rs3,000-4,000 crore through SIPs every year.
“Only new investors might like to opt for the new entry load benefits…because the existing customers feel that it may not make any significant difference in their investments by discontinuing the existing plans and reinvest in order to avoid paying the entry load,” he said, adding that while the company has told investors about the new norms, it has “not informed investors specifically about discontinuing their existing plans and re-register with us to avoid entry load”.
Distributors, who used to work on a commission from the entry charges, are also not stepping forward to tell customers about the new rules.
“Why should I shoot my own foot? No distributor would do it,” said a Mumbai-based distributor, who did not want to be identified.
V. Krishnan, vice-president and head of mutual finds at Integrated Enterprises India, a Mumbai-based distributor, said that a large part of the SIP clientele are passive investors and that not everyone is restarting SIPs to avoid the entry load.
K. Venkitesh, national head, distribution, Geojit BNP Paribas Financial Services Ltd, said that the majority of the flows in August were through existing SIPs as the ban put a crimp in fresh sales.
Large national distributors, however, said they are actively advising investors to shift to the new regime by re-registering but many still continue to pay entry load. According to a Mumbai-based official at Bajaj Capital, a financial services distributor, only 40,000-42,000 of its 130,000 SIP accounts have shifted to the new regime.
Anup Bagchi, executive director, ICICI Securities Ltd, which manages about 250,000 investors, said: “We had communicated our pricing structure to all our customers and proactively advised them to re-organize their SIPs to take advantage of no load benefit and our pricing structure. Over 70% have already taken advantage of our advice and have benefited.”
n.subramanian@livemint.com
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First Published: Wed, Sep 23 2009. 09 20 PM IST
More Topics: Mutual Funds | MFs | Investor | Investment | Sebi |