The Hindu Business Line : Initial expenses: How aware are we?

You may love your fund manager, you may swear by the funds you have invested in, you may even take pains to read elaborate fact-sheets. But are you aware of all the costs and expenses involved - elements that can seriously ruin what you thought were good investment habits and give you sleepless nights instead?

Before you reach for that handy box of sleeping pills, consider what some financial advisors are asking you to do. More specifically, take into account matters such as initial expenses, a factor that has lately become critically important in a situation marked by a flurry of NFOs.

Indeed, a relentless urge to garner fresh money has prompted MFs to introduce new schemes one after another. This has clearly led to greater expenses. The phenomenon, sources feel, was perhaps not significantly out of the way last year, not with the markets delivering handsome returns. However, it may not necessarily be the same this year.

Tune in at this stage to what Cholamandalam Distribution is trying to tell you: Control over initial issue expenses, besides regular expenses, would be critical for gaining customers' trust and delivering returns. Additionally, Chola is also of the view that in the coming days most fund houses may want to charge expenses to their investors to a great extent.

Is there a way to protect long-term investors from those who invest in NFOs with the intention of pulling out at the earliest opportunity?

Can regulatory agencies play a role here? What can the asset management industry do to keep short-termism on leash? These are some of the questions being asked in investment circles. In fact, never before were such questions asked more frequently, or with such great vehemence!

Let us turn to what SEBI allows fund houses to do. The market regulator permits them to spend a maximum 6 per cent of an NFO's collection on issue expenses and charge this to the fund. Now, this is amortised over a 5-year period. When this is done, even investors who did not enter during the NFO's initial subscription period (but trooped in later, within those 5 years) get burdened with a part of the initial expenses, Chola has pointed out.

The whole system seems to be in favour of the short-term participant - and at the cost of the committed, long-term investor.

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