Mutually beneficial

Coming to the current waiver, entry load on an equity fund today varies between 2.25 per cent and 2.5 per cent and is applicable to all investments in mutual funds, irrespective of whether they’ve been done directly or through a distributor. To illustrate, when an investor goes to a mutual fund to invest Rs 100 in its scheme, only Rs 97.5 goes for investment in the scheme and Rs 2.5 is deducted as entry load up front. This money gets paid to the distributor as commission even if he has had no role to play in the transaction.

What this regulation will do is that it will bring in multiple choices for investors and they can decide whether they need the advisory services of a distributor or not.

It will also act as a force on distributors to improve the quality of services they offer to an investor. The knowledgeable investor would definitely want to invest directly and save on the load. So the opportunity for the distributor lies with the huge mass of investors who require handholding while moving towards mutual funds.

Currently, India has around 40 million mutual fund accounts — less than 4 per cent of the population and about 4.8 per cent of household financial savings. This is insignificant when compared with the 56 per cent that go to banks and 14.6 per cent towards insurance.

What distributors will be required to do now is to work more aggressively to rope in the new investor class that is not yet comfortable in investing in equity markets. For this, they will have to raise the level of services they provide so as to convince investors to come to them for advice. There won’t be any fee by default for them any more and they will now have to work for it. Advisory will have to be made their unique selling proposition (USP) rather than just working as pick up and delivery agents. If this happens, and which is expected to be the case, the market as a whole will evolve on the learning curve.

India will have a larger class of investors who are more knowledgeable and have better understanding of the mutual funds industry. But before this, the distributor community will have to upgrade itself and will have to invest in creating talent.

This move will also reduce the huge churning of portfolios, which is a common phenomenon in the mutual fund industry. Frequent churning of portfolios has been a practice adopted by distributors just to earn the fee applicable on it. The churning also takes the investor away from the long-term investment philosophy of equity investing.

What should be expected now is a quality driven and more responsible distribution community. This move also seems to be the first step forward in the area of offering fee-based advisory services, which is the case internationally. When investors see value in the advice, they will pay the industry for its upgradation from agents to financial planners. In the interim, however, and as many heads of AMCs fear, there will be a shift in distributor recommendation from mutual funds to the high cost investment products like ULIPs from the insurance industry, where the first year commissions can be as high as 40 per cent, compared to 2.5 per cent in mutual funds. While a start was made by bringing in increased transparency in ULIPs by the insurance regulator yesterday, more needs to be done towards cutting costs.

sandeep.singhexpressindia.com