Load-free investing

FUNDS FUNDAMENTALS

No entry charge in mutual funds will be good for the informed investor.

The Securities and Exchange Board of India (Sebi) has recently proposed to do away with entry load to invest in various mutual fund plans if the investor directly approaches the fund house.

At present, this option is only available to large investors (Rs 5 crore or more) or for investments in funds belonging to Benchmark Mutual and Quantum Mutual.

Obviously, the distributors and some mutual fund companies oppose this proposal. But investors could benefit in more ways than one, if this proposal is implemented. Here are some reasons:

Save costs: At present, the investor pays as much as 2.25 per cent just to enter the fund. This amount is passed on to the distributors.

In other words, after investing, the fund would have to generate a return of 2.30 per cent for the investor to recover this entry charge. That is a steep price to pay just to make an entry into an investment vehicle.

More transparency: It will lend more transparency to the whole process. Generally, most investors are not aware that this cost is recovered from their investments.

And it is not uncommon to find distributors lying to investors by saying that the load cost is borne by the asset management company and not by the investor. If the investor is given the choice to directly approach the fund house without a charge, the exact nature and amount of the entry charge will become apparent to all.

Portfolio churn: Each time a client exits one fund and enters another, the distributor makes an additional 2.25 per cent. It is in the distributor's interest to advice clients to exit from existing portfolio of funds to another set of funds.

For investors, who enter and exit funds frequently, the entry load would compound to a decent sum in a year that automatically eats into returns.

Do-it-yourself investor: Entry load is the worst thing that can happen to a knowledgeable do-it-yourself investor. Why should he pay this additional fee to the distributor?

If the investor has done all the hard work and research to identify the right fund for himself, there is no reason why he should be paying a fee to someone else. He should only be paying the fund management fee to the mutual fund for investing his money judiciously.

Broker versus distributor: Services provided by both the stock broker and mutual fund distributor is the same. They provide a platform to an investor for buying stocks or mutual funds. Neither has the responsibility of ensuring returns.

Therefore, there is no reason that the stockbroker earns a brokerage of 0.2 per cent, while the mutual fund distributor earns 2.25 per cent.

The argument of distributors is that the quality of service will suffer if investors are allowed to buy directly from the fund house without any entry load. But clearly, investors should be allowed to decide if they want to spend by going through the distributor or take the call themselves.

The proposal, if passed by Sebi, will change the way funds are sold in India. If the service by the distributor is as good as they claim, then he should not worry about losing investors. Let market forces decide.

The writer is director, Acorn Wealth

Argument for no load

Informed investor will benefit

Entry and exit during the year will be cheaper

Stock brokers get 0.2 per cent while mutual fund distributor gets 2.25 per cent

Investors will be aware of the costs they are incurring