SEBI ends Entry Load on Mutual funds Schemes
POSTED BY ON June 19, 2009 COMMENTS (12)
Cheers !! .. SEBI now says :
“Investors will not have to pay an entry load for investing in mutual fund schemes anymore. They will instead pay a commission to their distributor or advisor directly and the quantum of the upfront commission would be mutually agreed upon.”
More Competition and hence little cheaper for Investors
Now agents will not be getting commissions from Mutual Funds companies which means that now there is direct competition among Agents. The agents can only ask for more if he really gives good service to buyers else they have to settle with a low commission which will be decided by customers.
This means now we can bargain with the agent on commission percentage and if he is not ready with what we offer him/her. We can look for someone else who is better and fits us.
Higher Quality of Service and more transparency in Market
Now agents will have to deliver much better quality of service and be more transparent with investors as their bread and butter is directly linked with Investors and not with the Mutual Fund Companies.
Lots of agents will now move to sell ULIPS rather than Mutual Funds
This move will also force lots of mutual funds agents to shift their focus on ULIPS and similar products which have commission linked with premium paid by customers rather than fee based model like we now have in case of mutual funds. This means more miss-selling in ULIPS is on the cards.
See the following New Video To understand
Update: thanks to income.portfolio for this.
AMC’s are allowed to use 1% of redemption in mutual funds for commission to agents and all the marketing costs. Its the money from exit loads which has to be utilized in commissions and other marketing costs. Most of the mutual funds have less than 0.5% of 1% of exit loads at this point and with this rule of SEBI, it can not go above 1% in future. Also it can be “up to 1%”. So this 1% will be used for every type of cost incurred by mutual funds.
Now most of the funds will have exit loads only if investor gets out in short term like 6 months or 1 yrs. Hopefully it will not be after 1 yr. So its a concern for those who are short term investors. Its not a matter of concern for long term investors as far as I think.
Also, now there is no need for PAN Card for investing in mutual funds up to Rs 50,000 through SIP as per SEBI new rules.
I am out for a 2 day weekend Trek to Kumaraparvata. So no article till Monday morning. I will post the 2nd article of “How a newcomer should start in Stock Markets?” Read Part 1 Here .
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I have more questions to everybody:-
1) “What is Mutual Fund” how many public knows in our country in terms of population?
2)What will Tier-3,4 town,villagers will do? Will they contact with CFP(what is that? from their angel) or CFP will visits regularly all villages just like a doctor?
3) For those who have ordinary savings account system account How could they issue brokerage cheques to their agent?(though SEBI circular doesn’t say 2 cheque models)
4)What will be happen if agents are not disclose to investor what commission he is getting from other AMC? Is SEBI hiring detectives?
5) Those who don’t know about “Mutual Fund” who will educate them? (Though Rs800 crores lies in Govt investor education & protection fund) Why Govt is deaf & dumb regarding this matter?
6)80% money in Mutual Fund is from 10 metro Cities & 20% from rest of INDIA.In what interest an agent will chase behind remaining 80% financially illiterate public if he/she is not remunerate?(Definitely that public will never know the flavor of Mutual Fund)who will go to them?
7)Are you sure that entry loads is going towards agents commission?Have you carefully checked the balance sheets of any equity Mutual Fund Scheme compared with debt Mutual Fund schemes?(I found huge anomaly there)
and finally:-
8)Why we could not buy/sale shares directly from stock exchange web site? Why a broker needed?Each and every time broker is cutting our pockets with a hefty brokerage and in a long run it is more than 2.25% entry load of a equity Mutual Fund scheme.Do they have powerful lobby & giving bribes to SEBI for keep shut their mouth regarding this matter?
Manish,
Can you guide us with these points
thanks
Pravin
1) See archives
2) currently Financial planning is not even a word for small cities , it will take time
3) No idea
4) As per rule, they have to , if they dont , complain to IRDA .
5) This is my question too .
6) Thats very logical , most of the money is there in citites , so more investments will also come from there . in small cities people first have to save more .
7) I havent checked properly , but thats what entry loads are used for as per definition , If there is any anomoly its IRDA to answer .
8) its not possible to Stock exchange to provide that . Its a matter of resources i would say .
Manish
@income.portfolio.
There are some important notes here
AMC's are allowed to use 1% of redemptions in mutual funds for commision to agents and all the marketing costs . its the money from exit loads which has to be utilized in commisions and other marketing costs . Most of the mutual funds have less than .5% of 1% of exit loads at this point and with this rule of SEBI , it can not go above 1% in future . also it can be "upto 1%" . So this 1% will be used for every types of costs incurred by mutual funds .
Now most of the funds will have exit loads only if investors getout in short term like 6 months or 1 yrs. Hopefully it will not be after 1 yr . so its a concern for those who are short term investors . Its not a matter of concern for long term investors as far as i think .
The second point about commisions to agents . it is a debatable topic and people have different views on this . my view is that with increased competition , there will less commision charged by agents . Also only good agents will survive the market now as people will only pay for quality advice . Agents who just gave top-5 mutual funds from some websites are going to be dead 🙂 .
Lets see how it unfolds in coming months. At this time we can only predict 😉
However there are some learnings for me here .
What do you think ?
manish
Manish,
I wanted to respond here, but it turned out a long response. So i made a post out of it on my blog.
Best Wishes,
Sometime in Jan '08, SEBI declared that applications submitted to the AMC collection centre or Investor service centre not be subject to Entry load.. In June '09, SEBI declares abolishment of Entry load totally.. These are indeed welcome moves!
Thanks and Regards,
-Vibhav Nayak
@investor
a) No idea yet , I guess they will come up with the % figure soon .
b) You can surely redeem it directly , you must have the documents and folio number, thats all you need to redeem .
I really liked this one – "this is like a lay off for Indian Mutual Fund Advisors." , Great one !!
@income.portfolio
Thats an opinion . My opinion is like this .
– Given that investor also has a choice to invest through the AMC at zero cost , agents will be ready to settle for less then 2.25% .
– Given this is also a competetive market , its almost going to be a market where one wants to give there service even though they get a bit less .
– May be the commission figure settles in an equilibrium range of .5-1% .
– This like this , If you are a agent and you think you will hike your commision at 4% , wont some other agent be ready to service at 3.75% , and other one at 3.5% and like this it will come to some point which is really worth paying those agents , something in range of .5-1% . I am not sure if this logic is ok or not !! , please correct me or give your argument .
any idea what will happen in below cases..
a) Buying SIP or MF from ICICI Direct or any other Demat Services ?.. I believe we still need to pay some brokerage.
b) I have few SIP that I purchased via righthorizon.com. If I want to redeem, I assume I can directly approach the MF House instead of this broker.
I think this is like a lay off for Indian Mutual Fund Advisors.
To me, the concept of "commission" in any advisory service is boat load of crap.
It should be fixed fees based service.
Commission will be driven by agents, take it or leave it. As a matter of fact, now the commission will increase because there is no checks and balance. An agent will hike his commission on short term results. While consumer will lose long term. And there will be low commission agents (acting as double agents) selling another crap. WHO and HOW will one prevent them from being double agents?