The Securities and Exchange Board of India (SEBI) has proposed to waive the entry load for applications received directly by asset management companies (AMCs). These will include applications received directly at AMC offices, or online, or through collection centers that are not brokers, agents or distributors.
The proposal has everyone asking how such a measure would affect investors, mutual fund advisors, and the mutual fund industry itself. SEBI is only proposing to make it possible for investors to invest directly and save money in the process.
For investors who have the ability and time to design and monitor their own mutual fund portfolio, and to tweak it when required, this would surely be a good thing. But would mutual funds be allowed to penalize direct investors who jump in for the short term, take advantage of market movements, and then bail out? In the absence of a penalty, short-term investors could misuse the entry load waiver, possibly at the expense of long-term investors.
A penalty could perhaps be something along the lines of a Contingency Deferred Sales charge. From the perspective of AMCs, entry load waiver would mean additional costs. The entry load that AMCs charge covers not only brokerage paid to distributors, but also costs like advertising, printing, and registrar and transfer charges. AMCs would not have to pay brokerage in case of direct applications, but they would still incur the other expenses.
Direct investors would not contribute towards these. For investors, there are issues like the long-term growth of their portfolios, and what they would lose by investing directly. An entry load is a non issue for a long-term investor in an equity fund.
Considering that entry load is a one-time charge, and that the time horizon for most serious investors is at least three years, it works as low as 0.75% per annum for ongoing funds.
Many of the debt and debt-oriented funds donâ€™t charge an entry or exit load anyway. Because entry loads impact returns from debt funds even more than from equity funds, mutual funds do not charge an entry load on these. This is commendable.
Many investors in the marketplace are still unsure about what to expect from various mutual fund products. Itâ€™s possible that investors who lack the capability to take the right decisions may be tempted to invest on their own, rather than consulting a professional advisor, and may suffer in the process.
Itâ€™s true that investing in mutual funds involves more complex decisions today than ever before. Investors have a wide choice, but selecting the right funds to meet different investment objectives can be quite a challenging task.
There is a range of equity, debt, balanced, and money market funds, all with varying degrees of risk and potential for returns. Besides, the task doesnâ€™t end with designing a portfolio; one must monitor it, too.
Often, investors switch from the non-performing scheme of a mutual fund to another scheme of the same fund, just to avoid paying an entry load. But in the process, they may be overlooking many outstanding schemes of other funds.
In the long term the lost opportunity could actually be worth a lot of money. In effect, that would mean the avoidance of the entry load came at a heavy price. Of course, not every investor who consults an advisor gets the best possible returns from his or her mutual fund investments.
Although the quality of advice has improved substantially over the years, much still remains to be done on this front. But itâ€™s also true that some investors do not take the time to find a good advisor.
The result is they end up either making wrong investment choices, or dealing with advisors who donâ€™t do justice to their money. A professional advisor can help an investor examine his financial goals and risk tolerance, review and select appropriate schemes, and monitor and update his portfolio as his needs change.
A quality advisor would also ensure the best possible returns through careful selection of schemes based on research and a solid understanding of markets.
As for SEBIâ€™s proposal, it remains to be seen as to when and how it would be implemented. In the meantime, advisors who are feeling insecure should pull up their socks and move from â€œsellingâ€ to â€œvalue-based adviceâ€. At the same time, from the regulatory point of view –products like insurance merit the consideration of similar measures.