The Hindu Business Line : Distributors moot variable entry load model

Select sections of the distribution fraternity, faced with predictions that the zero entry load norm mooted recently by the Securities and Exchange Board of India (SEBI) will be a major killjoy for them, have veered around to the view that there needs to be a ‘variable entry load’ model where an investor and an intermediary can arrive at a settlement on a case-to-case basis.

A variable system will allow clients and their distributors to negotiate the load, depending on the nature of the transactions in question. This is the crux of the message that seems to be going out from certain leading distributors to the Association of Mutual Funds in India (AMFI), which had earlier sought an opinion on the issue from them.

Mr Rajiv Bajaj, Managing Director, Bajaj Capital, has referred to the fact that he has advised AMFI to go in for variable entry loads. The strategy is to allow both parties to negotiate on “a transaction-to-transaction basis depending on the perceived value of advice seen by the investor”, he has stated.

The move may be seen in the backdrop of the regulator’s recent move concerning mutual funds, which is expected to encourage direct investments. While many intermediaries have generally expressed strong opinions on the matter, select quarters, including boutique fund house Quantum Mutual Fund, have hailed it in uncertain terms.

Bajaj Capital, in fact, has proposed to sharpen its internal systems further in order to augment the value of its services and advice in the eyes of its clients. Its recent interactions with clients, cutting across centres, have indicated that not all categories of investors will consider investing directly.

Two-track system

On the other side of the spectrum are sections within the distributor community that have proposed a two-track system for charging loads. This, says Mr Sameer Kamdar, Head of MFs at Mata Securities, will discourage mis-selling and address sensitive issues such as excessive churning.

“We can (instead of variable entry loads) have a system marked by two options. One, let investors choose a zero-entry load option carrying a higher exit load. Or, two, let them choose a fund carrying an entry load but no exit load,” he maintained.

Scope for long term investment

The argument, as proponents of this system put it, will enable money to remain ‘sticky’ – that is, fund houses will be able to retain an investor for a longer period of time. The cause of long-term investment, championed by many quarters, will also be served by this, it is felt.

A variable model, Mr Kamdar observed, may work in a more responsible environment, one that has bred a set of independent financial advisors, including people who charge fees for services rendered. “Otherwise, this may actually lead to a massacre of the retail customer,” he said.