I am a convert. When the entry load ban was introduced by C B Bhave, the then chairman of the Securities and Exchange Board of India (Sebi), I was thrilled. Having heard stories of how distributors had sold 125-150 mutual fund (MF) schemes to hapless investors, I felt this move was it.
Its been two years since, and now I believe the entry load ban served little purpose. While Sebi has indicated the investors saved at least Rs 2,000 crore due to the ban, I do not think it to be a relevant number.
The number of folios, perhaps the only indicator to know retail participation in MF, has fallen in the last two years. In March 2008-09, the folios were 40.81 million, which have slipped to 40.51 million in April 2011. That is bad news. We need retail investors in equities, especially through MFs.
Direct investment in equities is too complex. Like a chief investment officer of a fund house said during the Coal India issue, “I almost missed investing in the issue. Being a first-time investor in direct equities, I had to open a demat and a trading account. The process took me 15 days. The brokerage guys kept on coming back with clarifications on the document.”
Once you have opened the account, there are other problems as well. For example, if you put a lump sum in the trading account, it could be misused. Many brokerages push for futures and options, sometimes by luring with high returns, and at other times, even without permission. This helps them earn fee. But the investor’s money is at risk.
Internationally, retail investors participate in the stock markets through exchange-traded funds (ETFs). These mimic an underlying index such as the Nifty-50 or the Sensex-30. They are cheap because the fund manager does not need to apply his ‘stock-picking’ skills. However, in India, these have not done so well, mainly because investors need a demat account. Also, till recently, fund houses were not pushing these aggressively. Globally, investments in ETFs stood at $1.3 trillion in December 2010. By comparison, in June, Indian fund houses could manage only Rs 7,625 crore or $1.7 billion.
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The purchase of Benchmark Mutual Fund by Goldman Sachs (specialists in ETFs) is being seen as an important step towards developing the industry. Goldman Sachs’ asset management company was managing $840 billion, as of December 2010. Others like Motilal Oswal are also following the ETF route with schemes like Nasdaq 100.
But what hurts the investors most is the insurance industry. Despite strict guidelines from the Insurance & Development Authority, insurance agents continue to earn more from sale of insurance products.
While MF distributors are talking 50 and 75 basis points (bps), insurance agents are easily making 500 bps and more. That is 10 times more commission.
In such circumstances, paying one to two per cent upfront to the distributor for an MF scheme may not be exactly high. Yes, there need to be checks on the distributor, as he may lure the investor into shifting schemes often.
For that, we need a system that will reward a distributor only when he gets long-term investors into an equity scheme. But higher trail commission is just one way. The regulator needs to find other ways to ensure only long-term money comes into the MF schemes.
