Abolishing Loads In MFs To Benefit All

Three days ago, SEBI chief M. Damodaran initiated one of the most significant acts of reform in the country's mutual fund industry for a long time. The market regulator wants the 'load' that is deducted from mutual fund investments to be abolished for those investments that are made directly with fund companies instead of being done through fund distributor.

This reform has produced a great deal of alarm among fund distributors and probably fund companies but in my opinion, this reaction is premature. Eventually, it will lead to a situation that is better for investors, distributors as well as fund companies. Let's see what load is and why this innocuous-sounding reform is so significant.

What is called 'load' in the fund business is the commission that is deducted out of the amount that an investor invests and paid to the distributor who does the selling. Conceptually, it is a fee paid by the investor in exchange of the investment advice and the service (helping fill the form, depositing it etc). The problem with the way load works till now is that it is effectively a single, fixed price for the distributor's services regardless of the actual quality of those services and regardless of whether the investor needs or uses those services. And the price is not exactly low-loads are generally 2.25% for equity funds.

Now, SEBI has said that if an investor goes directly to the fund company without a distributor being in the picture then the fund company should not deduct load. From whatever I've heard so far, fund distributors around the country are in a state of panic.

Suddenly they find that they are trying to sell a product that is available cheaper elsewhere and there assumption is that now no one will buy from them. Is this panic justified? I think that given that the load is supposed to be paying for investment advice and service, those distributors who are actually delivering these should see this as an opportunity rather than a threat. But for that to happen, SEBI's proposed reforms will have to be taken a logical step forward.

Source : www.indian-commodity.com