Brushing aside opposition from fund houses and distributors, the Securities and Exchange Board of India (Sebi) today decided to ban entry load for all mutual fund schemes from August 1.
Sebi has, however, exempted existing systematic investment plans (SIPs), which means investors in these will continue to pay 2.25 per cent entry load per month.
The application forms for the schemes will now carry a disclosure that the upfront commission to distributors will be paid by the investor directly based on his assessment of various factors, including the service rendered.
On exit loads charged to the investor, a maximum of 1 per cent of the redemption proceeds would be maintained in a separate account which could be used by the AMC to pay commissions to the distributor and take care of other marketing and selling expenses, Sebi said, adding that any balance would be credited to the scheme immediately.
According to a senior executive of a leading mutual fund, there was no reason to impose this restriction. While the insurance industry paid Rs 12,000 crore on an assets base of Rs 120,000 crore, the mutual fund industry paid only 927 crore on an average assets of Rs 580,000 crore, he said.
Distributors had been saying it was almost impossible to collect advisory fee directly from investors as stipulated by Sebi. At present, mutual funds deduct service tax and pay the distributors. The new system means there could be huge slippages in service tax paid by the fund industry.
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Sebi said in a late evening press release that distributors would have to disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from among which the scheme was being recommended to the investor.
The new rules will be applicable for investments in mutual fund schemes (including additional purchases and switch-in to a scheme from other schemes) and redemptions from mutual fund schemes (including switch-out from other schemes). AMCs have been advised to monitor compliance, Sebi said.
Sebi has been taking various steps to empower investors in mutual funds by way of more transparency in the loads borne by the investor so that he/she can take informed investment decisions. The regulator had earlier abolished initial issue expenses and mutual fund schemes were allowed to recover expenses connected with sales and distribution through entry load only.
Further, investors making direct applications to the mutual funds were exempted from entry load. In the existing arrangement, though the investor pays for the services rendered by the mutual fund distributors, distributors are remunerated by AMCs from loads deducted from the invested amounts or the redemption proceeds.
Further, all loads, including contingent deferred sales charge (CDSC) for the scheme, have to be maintained in a separate account and this amount is used by the AMCs to pay commissions to the distributors and take care of other marketing and selling expenses. It has been left to the AMCs to credit any surplus in this account to the scheme, whenever felt appropriate.
Another CEO of one of the top fund houses said the limit on exit load was to dissuade fund houses from charging extra expenses and passing on the burden to the investor.
In order to incentivise long-term investors, it is considered necessary that exit loads/CDSCs which are beyond reasonable levels are credited to the scheme immediately.