India’s stock market regulator, the Securities and Exchange Board of India (Sebi), has proposed changes to mutual fund fees that would make it cheaper for investors to own them, depending on who they bought it through.

If Sebi has its way, investors could walk into the office of a mutual fund firm, buy any of its funds and walk out without paying any kind of entry fee (or entry load as companies term this). As of now there is no incentive for investors to do so as the mutual fund firm charges an entry fee from all investors, irrespective of whether their purchase is direct or routed through a distributor.

Free entry: Sebi chief M. Damodaran. If the stock market regulator has its way, investors could walk into the office of a mutual fund firm, buy any of its funds and walk out without paying any kind of entry load.

Sebi proposes to waive the entry fee for direct applications received by mutual fund companies either through their investor service centres or the Internet. Sebi’s argument is that since the entry charge is utilized by fund firms towards meeting the distributor’s commission, investors making direct investments shouldn't be asked to pay this charge.

If implemented, the plan can bring down the cost of investing in mutual funds.

Sebi has asked for public comments on the proposal that has been put up on its website. Comments can be sent in by 12 September.

In mature markets such as the US, many mutual fund companies offer separate plans within the same mutual fund scheme, with varying entry costs of loads on each. Fidelity Investments, for instance, offers an option in all its funds whereby investors do not need to pay any transaction fees.

“The current norms have been unfair to the do-it-yourself kind of investor who thinks he doesn’t need guidance or advice of the distributors. But these investors have no incentive for going to the fund company as he still had to pay the entry fee" says Dhirendra Kumar, CEO, Value Research India Pvt. Ltd, a Delhi-based mutual fund research house.

Kumar adds that the proposal is likely to face stiff resistance from both the asset management companies and the distributors. Fund companies, he says, derive most of their business through distributors. According to industry estimates, nearly nine out of every 10 units of mutual fund schemes sold in India are through distributors.

Interestingly, there is no Sebi rule that prevents fund companies from providing no-load funds to investors. The rules just prescribe the maximum fee which can be charged—entry fees can’t exceed 6% and the exit fees can’t exceed 4%. However, fund companies are unlikely to provide no-load or no-cost plans unless mandated to do so by Sebi, according to the chief executive of an asset management firm who did not wish to be named. “Until imposed by the regulator, it will not take off," he adds.

If this happens, distributors will need to justify why investments need to be routed through them, says Sanjay Santhanam, vice-president sales and marketing at Sundaram BNP Paribas Asset Management Co.

Ajay Bagga, chief executive officer of Lotus Asset Management Co. says that Sebi’s proposal has merit, but adds that firms need to ensure that the direct route is not exploited by the investors. “Since there will be no entry load, investors can make quick entry and exit from the fund depending on the stock market movement. So the industry will need to ensure that there are sufficient exit barriers also," he adds.

But there are others who think that pricing should be left to the market forces. “Many mutual funds do have no load schemes in form of liquid and debt funds. Most of the funds have institutional plans which are without any load. So even though Sebi allows funds to charge load on such schemes, market forces do not. The product pricing of mutual fund should be left to market forces within overall maximum limit stipulated by Sebi as specific scheme of mutual fund is not an essential commodity and thus does not merit administered pricing." says Rajan Mehta, Executive Director, of Benchmark Asset Management Co. Pvt. Ltd.

The distributor community, too, is not happy with the proposal.

“We play a significant role in the process. So this should not be waived, if the investor is taking advice from the distributor," says Surajit Mishra, senior vice-president, Bajaj Capital Ltd, a large independent distributor of financial products.

Sameer Kamdar, country head of mutual funds at Mata Securities, says Sebi’s move could be counter productive to investors, mutual fund firms and distributors. “Investors expect high level of services from us. So if the proposals are implemented, it may so happen they ... invest directly. So distributors will shy away from selling mutual funds. The asset management firms will need to invest more in setting up their own investor service centres," he adds.

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