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Most Fund Houses Now Charge A Uniform 2.5% Entry Load On All Schemes
Kumar Shankar Roy | TNN

Chennai: With the market regulator Sebi directing mutual funds not to charge entry load for existing as well as new schemes, distributors face a battle of survival from online investment platforms which plan to charge zero upfront commission. At present, most fund houses charge a uniform 2.5% entry load (on the prevailing NAV) on all equity funds sold to retail investors including those who opt for systematic investment plans (SIP).

The entry load/commission effectively reduces the initial investment a person makes in a fund. So, if investment platforms walk the talk, they can save the SIP investor lakhs of rupees.

Though this amount can vary depending on the rate of return, SIP amount and investment period, it goes to show how investors in equity funds could profit from 'no entry commission' online platforms.

"We will still earn a trail fee of about 0.5% every year if we manage to retain the customer, like every other fund distributor. Our business will be based on large volumes and the lean structure along with technology will help us reduce our costs. Once the Sebi gives the finer details, we will offer any MF investor the lowest possible cost. Others will also enter this field but that will ensure competition as well as service," said Srikanth Meenakshi of FundsIndia, one of the first such online financial platforms.

While the Sebi in 2008 had waived entry loads for direct purchases made by investors in MF schemes, now the right choice of funds and customercentric advice will show whether distributors can really slug it out. "An upfront commission, high or low, is fair as long as the adviser has not charged you additional consultation fees and has given you advice with your interests in mind. It's altogether different if the agent only helped you in filling the form and acted as a postman delivering the forms to the fund house," Dhirendra Kumar of Value Research said.

For the time being, MF distributors like Birla Sun Life Distribution appear to be under tremendous pressure. "...this (Sebi's move) will give the individual investor the opportunity to create wealth. However, to achieve a multiple increase in retail penetration, who will take the lead in market expansion? Where will the funds come from, to fund this expansion?" asks Ajay Srinivasan, chief executive, Financial Services, Aditya Birla Group.

If a long-term investor (A) with a 20-year horizon invests Rs 10,000 each month in SIP of different mutual funds without paying the 2.5% distributor commission per transaction - the corpus at the end of the term would be around Rs 1.31 crore (before deducting annual recurring fund management expenses) assuming a 15% average rate of return. On the other hand, another SIP investor (B) who has to pay 2.5% distributor commission with all other attributes remaining same, would end up with around Rs 4-5 lakh less.