The Hindu Business Line : ‘We are glad on zero entry load proposals’

Kolkata, Aug. 26 The securities regulator has recently mooted the idea of doing away with entry loads for investors who buy funds directly, without distributors. It couldn’t have come at a better time, feels Mr Devendra Nevgi, CEO & CIO, Quantum MF. He should know, for Quantum has been championing this since its inception. “If okayed, investors who are rational enough to appreciate the merits of direct investments and low costs will be rewarded”, he argues.

Excerpts.

If an investor is not required to pay entry load, how does the economics work out for him?

If you are not required to pay an entry load, you will certainly benefit. SEBI rules talk about the total loads (entry plus exits), which should not exceed a certain limit. So if a fund does not charge exit loads, the entry loads theoretically can go up to this limit. But on an average the entry load is around 2-2.5 per cent. The entry loads collected are utilised for marketing and selling expenses, which usually do not result in any direct benefit to the existing investor. Normally, figures pertaining to entry loads collected and utilized are disclosed in the scheme’s balance sheet.

Will the latest SEBI move actually spur investors to bypass distributors?

If it is approved, many of the investors who are rational enough to understand the benefits of direct investments and low cost would prefer this route. It is simple. Consider a situation where you are given a choice of two funds with similar characteristics, one with an entry load of, say, 2 per cent and other with no load. The choice is clear.

You may wish to ask whether vested interests in the distribution business would disagree with it. Let me just say that anything that hurts would be opposed.

Does Quantum see it as an endorsement of its view that distribution merely adds to an investor’s costs?

We were the 29th fund house. But we were also the first to gather assets directly rather than buying them. We decided to choose this path in the interests of investors. Our SIP plans, normally used by small investors, do not have entry loads too. And we are glad that the regulator has proposed zero entry loads now, which is a positive step towards making the industry a little more transparent. This would certainly benefit plenty of retail investors who have been paying entry loads even though they had invested directly but were getting very little benefit out of it.

The big argument in favour of distribution is this: Distributors reach out to far corners. Considering that over 70 per cent of the MF industry is urban-centric, is there a basic flaw in the argument?

It is a fallacy that the reach of a fund improves in a distribution-driven system. Vanguard does not pay any intermediaries to gather assets. Yet it has managed to become one of the largest fund houses in the US, with an AUM of around $ 1.2 trillion (May 2007). SEBI should be complimented for proposing this, since it is in the broad interests of the investors. Assuming the industry’s urban-centric nature is corroborated by facts, it clearly underlines the point that the reach of a fund does not depend on the use of intermediaries.

What the industry needs is investor education on the right practices, which will help the cause of inclusive growth.

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