SEBI's balancing act

As concessions go, SEBI's recent decision to allow mutual funds to use their old (pre-August 2009) load balances towards marketing expenses is a mild one. The accumulated load balances are unlikely to be big given that the entry load collected from investors until August 2009, when it was banned, was already used by funds to pay distributors. The freedom to spend the balance may not make a big difference to the funds' marketing effort, especially as it is to be spread over three years. Yet, this decision has been greeted with some enthusiasm, coming as it does soon after the change of guard at SEBI. Mutual funds have been hoping for a more lenient regime ever since Mr U.K. Sinha was named Mr C. B. Bhave's successor at SEBI. The ban on entry loads has created an upheaval for the fund industry over the past two years. With upfront commissions curtailed, distributors have been forced to approach investors for a separate advisory fee. Those unable to make the switch have dropped out or sought greener pastures; this has reduced subscriptions to equity funds.

Despite this, though, SEBI should stick to its guns on the entry load ban in the best interests of investors. For one, the regulation has ushered in transparency and choice for investors and prompted consumers across the range of financial products to take a hard look at costs. Distributors have been upgrading their skills to play an advisory role. Fund houses have been forced to explore new channels, such as the stock exchanges, for direct investor access. Rolling back the ban now would undo these reforms that have been so hard to set in motion. Again, the regulation has not proved cataclysmic for the mutual fund industry. Gross inflows into equity funds did dwindle sharply from about Rs 12,000 crore a quarter just before the ban to a third of that level over 2008-09. However, that was as much a function of the stock market fall as of distributors not selling mutual funds. Since then, inflows have rebounded to quite a respectable Rs 15,000 crore a quarter, with funds recording a steady rise in investor accounts.

Yet, one aspect on which mutual funds can still complain is the lack of a level playing field with other financial products. The cost structure for unit linked insurance plans has been capped but investors are none the wiser today about how much of their money goes to pay agent commissions. Flat incentives are also the norm for most bonds and fixed deposits. If investors are to get a say in how much they pay for financial advice, a transparent fee-based model needs to apply to all financial products. The new SEBI Chairman could perhaps consider a dialogue with the other regulators on this.

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