Backstage entry of loads in Mutual funds?

SEBI, in its yesterday's meeting allowed mutual fund distributors to charge Rs. 100 as ‘transaction charge’ per subscription.  This charge is applicable only if the investment amount is Rs. 10,000 and above.  In case, the investor is investing in a mutual fund for the first time, an additional amount of Rs. 50 can be charged (i.e. total transaction charge of Rs.150) since Know Your Customer (KYC) norms needs to be fulfilled for such new investors.  In case of SIP investments, the transaction charge can be recovered in 3 or 4 installments.  The transaction charge will be deducted from the amount invested.

Transaction charge is applicable only on purchases and not at the time of sale.  Further, if an investor purchases directly from the mutual fund company (i.e. online via their website or directly submitting the form in their offices), no transaction charge is levied since distributor is not involved in such cases.

How will it impact you?

Prior to SEBI’s ban on entry load in August 2009, 2% of the invested amount was deducted as load for equity mutual funds and for debt funds there was no entry load.  Rs. 100 per subscription for Rs. 10,000 and above works out to maximum 1% irrespective of whether you invest in equity or debt funds.  Hence the cost of investing in debt funds will increase and have impact on your returns, more so since the debt fund returns are generally in single digits.

Though this charge will allow distributor to recover transaction related costs, they still shall not be incentivised to sell more mutual fund products.  The commission they earn on ULIPs and other investment products are linked to the value of the transaction and shall be quite substantial in comparison to the transaction charges. 

Thus, this shall not compel distributors to sell more of mutual fund products and the objective of SEBI to ‘enable penetration of mutual funds in smaller towns’ by allowing the above transaction charge may still not be achieved.

Can distributors still mis-sell mutual funds to me?

Yes.  Distributors earns only if you invest more than Rs. 10,000 per subscription.  Thus there is a possibility that distributors will tell investors to investment minimum Rs. 10,000 in every mutual fund transaction.  Also, in case one is investing say Rs. 30,000, distribution will tell investor to fill three different subscription forms for Rs. 10,000 each thus pocketing Rs. 300 as transaction charges (Rs. 100 per subscription form).  There is no dearth of ideas to extract more money and many more will evolve as time progresses.

How can you avoid / minimize transaction charges?

The best way, and the one Bachhat recommends is to invest in mutual fund online.  This will not entail any transaction charge.  In case you are living in cities where mutual fund company’s investor offices are located, you can submit the subscription form directly in their offices.

Also Read - Your Guide to Invest in Mutual Funds

 

Alternatively, you must ensure that in case you are investing regularly, you minimize it by either making your SIP period longer (i.e. instead of renewing your Rs. 5000 SIP every 3 months, make it for 12 months, so that you incur transaction charge only one time instead of 4 times earlier) or ensuring that each investment does not cross Rs. 10,000.

Will this move of SEBI make you change the way you are investing in mutual funds?  Do share your comments below.