Entry load move: Flat fee may not be big lure to agents

A change in the entry load dispensation for mutual funds, has been speculated ever since SEBI saw a change of guard in February this year, with Mr U.K. Sinha taking over as the new chairman.

Seen in that light, the move to re-introduce entry loads on mutual funds in the form of a flat charge of Rs 150 for a transaction (instead of the two per cent of transaction value that was in force earlier) on new folios and Rs 100 on old ones, may not make much of a ripple.

Below Rs 10,000 kept out

Such a charge, if levied on all transactions, may have proved expensive for small investors who are supposed to be the key target group for mutual funds. A charge of Rs 150 would amount to as much as three per cent of an investment of Rs 5000, usually the minimum ticket size for mutual fund investments.

Such a transaction-based charge may also have discouraged investors from taking the systematic investment plan (SIP) route, which now accounts for a chunk of inflows into equity mutual funds.

However, probably in deference to the above, SEBI has kept small ticket investments out of the purview of this new charge by specifying that it will be applicable only on investments above Rs 10,000. That's good news for investors.

Moot question

However, whether a flat fee of Rs 150/ transaction will be enough to woo the agent force back to marketing mutual funds in droves, after they have sought out greener pastures, remains a moot question. Much water has flown under the bridge since SEBI banned entry loads on mutual funds two years ago (in August 2009).

Mutual fund distributors, hit by the ban on entry load, have either moved on to other more lucrative products such as insurance or have transitioned clients to an advisory model.

Good news

Distributors selling products such as unit linked insurance plans or fixed income today enjoy a fee structure that is much more remunerative than that for mutual funds; a flat fee of Rs 150/ transaction may not make much of a difference to that equation. Fee structures in ULIPs or fixed income products are linked to the transaction value and a distributor may make sizeable revenues by advising a few high net worth clients.

In contrast, a flat fee of Rs 150/ transaction will require a mutual fund distributor to add and service a large and expanding number of clients if he is to generate substantial revenues. At best, the flat fee may provide large distribution houses with a minimum incentive to provide basic services such as collecting the form and the cheque, if he insists on buying mutual funds.

But the good news is, inflows into equity mutual funds have already been showing a gradual improvement with investors taking to SIPs despite the churn in the distribution fraternity.

Recent trends suggest that inflows into equity funds, therefore, may pick up automatically if the stock market shows signs of breaking out of its narrow range and pushing upwards. Irrespective of whether or not distributors get back in the game, investors may peg up their equity allocations if equity funds manage to deliver returns that are better than other options.

COMMENT NOW