MF Investors Cash In On Free Entry

Retail investors are capitalising on the New Year gift from Sebi, which mandated that no entry load should be charged on direct applications received by a mutual fund. An increasing number of retail investors are now approaching asset management companies directly. According to CAMS, a registrar that processes 60% of MF transactions in the country, 8% of applications in 2008 so far were made ‘directly’. It used to be 3% earlier.

Applications via the internet and those directly submitted to the AMC or its collection centre (without the intervention of any distributor) are considered as ‘direct’ investing. However, the increasing trend of ‘direct’ investing spells bad news for financial distributors, who will miss out on the entry load and trailing commissions. (Trailing fees are basically the commissions charged to the scheme’s assets and are usually in the range of 0.25-0.50% pa).

Driven to the wall, distributors have found a way to circumvent the regulation and are getting ‘direct’ applications processed through them. How does it work? First, the distributor will get letters from investors stating that their investments are solicited through them.

Then, the distributor would submit the application form to the AMC, along with this letter. While in normal cases, direct investing would not entitle the distributor to any trailing commissions, in the above case, the distributor gets the trailing fees. The investors don’t mind signing the letter as it would save them both paperwork and time. Besides, they will not be charged any entry load either.

Under normal circumstances, direct investing should improve profitability of AMCs as they don’t have to pay trailing commission to distributors. Yet, MFs have not gone the whole hog and promoted direct buying.

There is only a handful of fund houses with internet buying options today. Online brokers like ICICIdirect and kotakstreet, who distribute schemes of multiple fund houses, charge entry loads and are no different from an offline distributor.

AMCs are not keen to collect applications the ‘direct’ way, either. According to industry sources, investors normally visit the office of an AMC with their application and ask if the scheme under consideration is a good choice. To steer clear of such hassles, the AMCs are willing to let distributors do the paperwork on their behalf.

The intent of waiving the entry load was to reduce the cost for an MF investor. And that purposes seems to have been served. On their part, distributors are either launching or planning to launch no load funds in India.