The Hindu Business Line : ‘Let distributor and investor negotiate entry load on one-on-one basis’

Kolkata, Oct. 7 Let variable entry loads be introduced for investors, argues Mr Rajiv Bajaj, MD, Bajaj Capital, adding that this will be the most transparent way of reducing transaction costs. Introduction of variable loads also ensure the emergence of different distribution models – discount brokers, full-service advisors and so on, he tells Business Line.

Excerpts:

How do you expect investors to react to the SEBI move on entry load? Do you expect a marked shift in investor behaviour?

Sometimes too much choice is not good for the consumer. That seems to be the case with the new proposal to waive entry load for direct investors. At present, investors are clear that if they want to invest in funds, they are better off with the services of advisors/distributors because there is no price difference. However, now some of them may be tempted to bypass the intermediary invest directly.

These investors may not realise that they may be denying themselves the opportunity of getting investment advice and after sales service. These services may be invisible but they are indeed valuable. We feel that most sections will still prefer to use professional services of distributors because they may realise that they will never get a “Sell” advice if they invest directly with a fund.

Is there scope for having a dual system – that is, both no-entry load funds and with-load funds, subject to conditions?

The main objective of the regulators is to reduce transaction costs. There are many ways in which this objective can be achieved. Waiving entry loads for direct investments is only a partial solution. It is probably not the best solution. This is now right time to introduce the international model of variable entry loads for MF investors.

As per the present guidelines, variable loads are allowed at a scheme level. The case in point is institutional and super institutional plan introduced by different fund houses. Our recommendation is simple: let variable entry loads be introduced at an investor level. Distributors and investors can negotiate on a one-on-one basis, as to how much entry load can be charged to the investors based upon his perception of the value he is getting from distributors.

Is the average Indian investor willing to pay for advice yet?

An average investor anywhere in the world is not yet ready to pay for advice. Even in international markets, only 20 per cent of the advisors work on a fee basis. Some members of the financial planning community in India, especially those are at the high end, may feel this is the right time for them to start charging fees to clients (if entry load is waived). While there will be takers for the fee-only model, the numbers will be very small. Penetration of this service will be slow too.

Is there scope for fresh allocations to equity funds? Of, should investors wait for a decline?

We believe that over-emphasis on any asset class, whether equity or real estate, is not advisable. Any high networth investor’s portfolio today is dominated by these two. There is negligible allocation to safer assets like debt and cash. We have been waiting for the equity market to correct since the Sensex was at 15,000 points or so.

All you need is one negative event risk that may trigger a sharp correction. Remember, fundamentally it will not be difficult to justify even 20,000 points. Optimists say that it is only 18 times the 08-09 forward earnings.

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