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Are Mutual Fund (MF) entry loads coming back?

Sometime back, the Securities and Exchange Board of India (SEBI) abolished entry loads for mutual funds. But now, there have been indications that agent commissions might be coming back. Read on.

The Background

In December 2007, SEBI had removed entry load for open ended MFs if they were purchased directly from the fund house (not though an agent). (Check out “SEBI removes entry load for open ended Mutual Funds” for more)

And in a drastic move, it removed entry load for all MFs irrespective of the channel of sale (bought directly from the fund house or from an agent / broker) in August 2009.

 

The move to bring back the reward for agents / brokers / advisors

SEBI chairman U. K. Sinha has indicated that SEBI might bring back “incentives” for MF distributors / agents / brokers. This would be done to help make it more attractive for them to sell MFs.

 

Should you worry?

No, it is not yet time to worry – there has not been any formal announcement, and the mode of payment or the quantum of this “incentive” or fee or remuneration has also not been decided.

In fact, it is not even clear if this “incentive” would be paid by the investors. For all you know, the tab might be picked up by the MF houses!

Another option being considered is a per-transaction charge or load of100-150 – this would be paid by you, but it is definitely better than the percentage load that existed earlier.

 

What prompted this possible move?

The entry load was an upfront fee to be paid by MF investors. This money was used to provide commissions to the distributors / agents / brokers / advisors selling the MF scheme.

When the entry load was removed, these people were left with very little commissions. As a result, most of them shifted their focus to other financial products like Unit Linked Insurance Plan (ULIP) which paid out more commissions to them.

This lead to a massive reduction in mutual fund sales, hurting the entire MF industry.

(The decrease in MF schemes by retail investors also means a huge loss to the investors since equities provide the best returns over the long term, and MFs are the best vehicles to invest in equities – read “Stocks – The winning bet for the long term” and “Direct investment in Stocks versus Mutual Funds” for more)

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