Sebi is working on the details of a variable load structure.
Mutual fund investors in India may no longer have to pay entry or exit charges (loads) if the Securities and Exchange Board of India (Sebi) approves a proposed variable load structure for these instruments. Distributors, however, may be allowed to charge a load on some schemes – such as money market and some liquid funds — that mostly do not attract entry loads at present.
Sources close to the development said Sebi was working on the details of a variable load structure following discussions with representatives of Association of Mutual Funds in India (Amfi) and fund houses, and that new guidelines were expected in a few weeks.
“Variable load structures across all classes will allow an investor to negotiate the entry load with his distributor based on the nature of service and advice on offer,” explained Amfi Chairman A P Kurian.
“Variable load structure is common practice in many advanced economies,” he added.
Under the proposed structure, the investment application form will provide a separate space in which the mutually decided load will be stated and signed by the investor and the distributor.
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The two can mutually agree to pay a load below the maximum permissible 6 per cent irrespective of the load stated by an asset management company (AMC).
“Investors will get a chance to pay a significantly lower load for close- ended funds that charge the highest entry loads. This structure will particularly benefit rural and semi-urban distributors, who spend more than those operating in cities,” said the chief marketing officer (CMO) of a large mutual fund.
The new proposals are expected to lower AMCs’ pricing power. AMCs charge investors a load to cover distributors’ commission, marketing costs and fund management charges. At present, debt funds mostly attract an entry load of up to 1 per cent and equity funds 2.25-2.75 per cent. An AMC usually charges an exit load or trail if an investor redeems his investment before the stipulated maturity.
The new structure may reduce loads to zero in a host of funds, but distributors may start levying this fee on some funds, such as fixed income funds, that do not attract loads at present.
“Loads on some fixed income funds can go up to 6 per cent in some cases,” said a fund manager.
Some fund houses, however, think the Indian mutual fund industry is not developed enough to implement a variable load structure.