Bad idea: Why entry loads cannot revive India's MFs

Identifying revival of investor sentiment as a key focus area, the finance ministry and Prime Minister Manmohan Singh plan to resolve the problems of the mutual fund industry and check the slowdown in the insurance sector. One of the reforms being discussed is the reintroduction of entry loads - the charges that are levied on an investor when he buy any mutual fund from from distributor companies. The idea is to incentivise distributors to sell mutual funds.

However, the move is anti-investor as it eats into investors’ savings while fattening the wallets of asset management companies (AMCs) and their distributors. Experts believe that restoring the industry’s fortunes by bringing back the entry load could be a miscalculation. The end of entry loads improved the investible corpus and initial net asset values of investors. If marketed well, this should have got mutual funds more investors, not less.

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In fact, between March 2009 (Sebi banned entry loads on 1 August ) and March 2012, assets under management of equity schemes - where loads have been done away with - rose 45 percent. Clearly, investors have been buying their products in the absence of loads.

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Moreover, the interest of the investor lies in being suggested a good fund, and then sticking to it. And the only way a distributor’s interest should be linked to this is by escalating a trail commission. For example, if an investor holds a fund for 10 years, then the agent should be credited by the fund for holding on to that client folio.

But if no value is offered to investors from a mutual fund product, they should not be forced to pay an embedded commission by way of an entry load! And the ban on entry loads was introduced to address the issue of mis-selling and churning where agents would advise investors to keep switching schemes frequently just to earn more commissions even though this did not suit an investor’s risk profile.

Bring the load back will only dampen investor sentiment, especially when the market is so volatile, equities are not performing and there is lack of investor confidence in the government’s ability to bring about reforms. Such a move would only take investors elsewhere, which in no way is going to ‘revive’ the MF industry. Instead the government should balance the interests of investors which encouraging the mutual fund industry to broaden its sales and distribution channels.

In fact Sebi, which also thinks the entry load will hit consumers, said on Thursday that it will pitch for additional tax sops for investments of up to Rs 50,000 in equity schemes by individuals. The tax benefit could be added to the Rajiv Gandhi Equity Scheme which seeks to provide tax breaks to first-time investors in equities and could be made available to investors through the mutual fund route.

Dhirendra Kumar, CEO of Value Research, told Business Line that the government should facilitate mutual funds to launch pension funds to generate long-term funds.