Thursday, June 18, 2009

SEBI removes entry load on MF schemes

Market watchdog SEBI today asked mutual fund companies not to deduct marketing and distribution charges from investment made by subscribers, a move which analysts termed "revolutinary for investors".

SEBI's new guidelines stipulates that investors directly make payments to distributors instead of MF companies deducting it from the investment made in any scheme.

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly," SEBI said in a statement after its board meeting.

MF tracking firm Value Research online CEO Dhirendra Kumar said, "It is revolutionary move for investors which will bring greater transparency into the system. But, mutual fund distributors would be significantly hit and it may be unviable for the advisors.

An entry load is a charge levied by a MF when an investor steps in, to meet their marketing costs and distribution commissions. And as the entry load is deducted from the investment made by the investor, his total invested amount reduced to that extent. Usually, if an investor enters any MF schemes via a broker it attracts entry load of around 2.25 per cent, while the broker gets from an asset management firm a commission between 2 and 2.25 per cent or depending on the performance of the distributor.

"The profitability of the AUM could be hit by the move," Taurus MF Director R K Gupta said.

Further, the upfront commission to distributors shall be paid by the investor to the distributor directly, the statement said.

"But I think it is a good development from the point of view of investors, mutual funds and even the distributors. Now the broker commission would be provided separately from the investment made by the investor," Gupta added.

Interestingly, the distributors shall have to disclose the commission, trail or otherwise, received by them for different schemes or MFs which they are distributing or advising the investors.

"The distributors' role may be modified into an adviser who provides value added services to investors after this decision. However, in the short term the move may impact the distributors and fund houses," SMC Capital equity head Jagannadham Thunuguntla said.

The equity schemes of MFs are likely to be hurt the most as they attract the most entry load among schemes.

"It would hurt mostly the equity funds, which are the most rewarding for fund houses, Kumar added.

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