Wednesday, January 2, 2008

Why Mutual Funds Entry Load scrapping by SEBI is justified

Starting January 4 2008, mutual fund investors wouldn’t need to pay the existing entry load of 2.25% while investing in a fund directly through the fund house’s website or through its own customer desk. This is applicable to further investments in existing portfolios, schemes and to new schemes launched henceforth; basically, for any new investment made on existing or new mutual fund schemes.

Initially, when mutual funds were sold through brokers, the entry load was used to pay commission to the brokers. When fund houses started selling their funds online and directly through their channels, the role of a broker ceased to exist. Still, the fund houses were charging entry load, which was questionable.

For an amount of Rs. 100000 (one Lakh) invested in a mutual fund, the entry load took Rs. 2250 away from the investment amount. Considering a one time investment of Rs 100000 made on a mutual fund having a yearly return of 30% for an investment period of 15 years, Rs. 2250 alone could get a potential return of Rs. 115168 (more than one Lakh), which the investor stand to lose.

The set motive of mutual funds was to allow small investors with small chunks of money to invest and get the benefit of scale from the stock market. But if you look at the entry load, it’s waived for investments greater than Rs. 5 Crore in most cases, thoroughly favoring large investors, which is contrary to its purpose. The irony is investors who are able to invest more than 5 Crore would normally be companies, who take the benefit of mutual funds, that are primarily meant for small investors. Also, normally companies won’t invest for longer time periods as compared to small investors. Thus, the entry load of a mutual fund was a deterrent factor for small investments.

The process behind this move from SEBI started in August 2007. And now, when it comes to effect on the start of the year, it has become nothing less than a great new year gift to the small investors.

2 comments:

FundsM said...

Yes you are right.

FundsM

Mutual Funds Online said...

Very clear post about Indian mutual funds market. I enjoyed reading the post!