India's mutual fund industry has been the cynosure of all eyes for the past several weeks. After capital market regulator Securities and Exchange Board of India (Sebi) announced a ban on entry load from August 1 and declared parity among all classes of unit-holders while charging exit load, experts believe mutual fund sales in the Indian market will not be the same as before. Several asset management companies, which run mutual funds, are slowing new fund offers (NFOs) following the ban on entry load.
Before the ban on entry load, investors paid an entry load of 2 to 2.25% at the time of investing which covered the asset management companies' selling and distribution expenses, commission to distributors. Now, an investor will receive units for the entire amount invested in schemes. They can now decide the commission payable to distributors in accordance with the level of service. Earlier, several fund houses paid an upfront commission to distributors to sell their products. Sebi's new proposals allow investors to directly make payments to distributors for their services, instead of mutual fund houses deducting them from the investment amount.
Post October crises many fund houses stayed away from launching the fund. However, Reliance Mutual Fund mobbed up around Rs 2,350 crore in their Reliance Infrastructure fund, which was launched in the month of May, 2009. While ICICI (ICICIBANK.NS : 748.25 -8.95) Prudential target fund collected Rs 800 crore, which was started on April, 2009.
Dhirendra Kumar, chief executive officer of Valueresearch Online, said, "Earlier, fund houses used to pass the entry load to the distributor, but now with ban we will see less number of NFOs. Not that there will be no NFOs, but the number will certainly come down in the next few months which will in turn hit the profitability of fund houses."
Sebi in its release also said, "The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes which they are distributing or advising the investors."
Some market players feel that in the beginning the profitability of the fund houses is likely to take a hit, not only due to the ban on entry load, but also due to the increased spend on marketing, distribution and administrative expenses. Sundeep Sikka, CEO of Reliance Mutual Fund, says, "In the initial period, there are likely to be some problems (for the fund houses). But the regulator's move will certainly empower the investors and in the long run we can certainly make good amounts of profit."
Sebi earlier had mandated zero entry load in cases where investors apply directly for the schemes of mutual funds with effect from January 4, 2008, which received moderately good response with about 4%-5% mutual fund applications being made in this mode.
But with ban on entry load, distributions houses are likely to take a hit as some of the players believe that it will be very difficult to convince investor to pay a fee for the service given.
Sabapathy Iyer, CEO of JR Laddha Financial, a Mumbai-based distribution firm, says, "In a bull market there are chances that people will pay us but during a bear run, we fear the advisory fee will take a huge hit. It will take some more time for everything to settle down."
After the ban on entry load, several strategies were taken by different fund houses such as giving upfront commission to the distributors from their own pocket and increasing the exit load from one-three years from the earlier six months to one year. An exit load is a fee collected at the time an investor withdraws money from a fund.
According to one of the senior official from the leading fund house, "The main aim to increase the exit load was only to make up for losses from the ban on entry load. But now with Sebi bring the parity among all the classes of unit holders, we can't do much at that end." Until now, these firms typically charged up to 1% exit load for retail investors for premature redemption and big ticket investors who invested above Rs 5 crore did not have to pay any exit load.
Sebi in its circular dated August 7 said, "It is observed that mutual funds are making distinctions between the unit holders by charging differentials exit load based on amount of subscription. In order to have parity among all the classes of unit holder, it has now been decided that no distinction among unit holders should be made based on amount of subscription while charging the exit loads."
Market participants believe that this move will have more impact on the big ticket investors rather than retail investors. In fact now we might witness a separate new scheme floated for the institutional investors by the fund house.
"If a fund house come out with a scheme stating that, no entry load or exit load will be charged for the investors investing minimum Rs 2 crore or above that, then Sebi will not have any problem with that and fund houses can also save their clients," added Kumar.
He further states that, apart from that, some fund houses will reduce the existing load structure. While some might roll back the current lock-in period of three years. With the steps taken by the market regulator, the fund industry is likely to grow in the long term believes some of the players. Currently asset under management of fund houses stand at Rs 689,946 crore for the month of July, according to the association of mutual funds in India.
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