Friday, January 18, 2008

NO-LOADS IN MUTUAL FUNDS ARE FINALLY HERE

Sebi introduces no-load options for direct investments in mutual funds

Isn’t it sad that if you have been investing in mutual funds (MF) after researching about various options, zeroing in on the chosen one, filling up forms and submitting them to the fund house, all of this by yourself, you still had to pay the upfront charges or entry loads to the MF house, that would eventually be passed onto agents?

Not any more. The securities and exchange board of India (Sebi) has scraped entry loads on direct applications to MFs. This means that if you invest directly with the fund house by submitting your application forms at any of its collections centres, you don’t need to pay entry loads (presently 2.25 per cent). Internet transactions done through the MF’s website are also now exempt of loads. However, if you apply to MFs through an agent, you will continue to pay the entry loads. No-load options will now be available in all existing schemes as well as new schemes. Load would be charged even if you apply to MFs through online web trading portals like ICICI Direct. It’s only when you buy units from your MF’s own website that you get exempted from paying entry loads.

The power of compounding
A 2.25 per cent entry load sounds small, but bites a chunk of your returns over a long period of time. For instance, Rs 1,00,000 invested directly in the no-load option of an equity fund that grows at a rate of 15 per cent over a period of 20 years yields you Rs 16,36,653.74 , as against Rs 15,99,829.03 that a load fund would return - a difference of Rs 36,824.71. This is because even a small sum of 2.25 per cent gets compounded over the years.

It may not pinch you as much in a one-time investment as it typically does in a systematic investment plan (SIP). As SIPs entail investments on a regular basis, say every month, you end up paying entry loads on all your installments. Assume you had invested Rs 5,000 in Reliance Vision Fund on January 1, 2003 through a monthly SIP. If you had withdrawn your entire investments after five years, on December 31, 2007, you would have got back Rs 11.52 lakh in the no-load option, as against Rs 11.25 lakh in a load option, a cool difference of Rs 25,914. Think of the things you could buy with Rs 25,914!

Says certified financial planner Jayant Pai: “This is a bold step and would help informed investors to approach MFs directly without unnecessarily paying agent commission.” Adds Ranjeet S. Mudholkar, CEO, financial planning services board India: “It promotes financial planning as those agents who were merely form vendors will now need to upgrade their skills and offer complete financial planning to their clients. They now need to earn their 2.25 per cent commission.”

Fears
Though many MFs, distributors and planners have welcomed the move, a section of the industry is worried. They feel a few smart investors might consult a financial planner but then invest directly with the MF, thereby avoiding entry load. “This is possible. But agents are also vigilant and will come to avoid such investors eventually”, says Pai.

Most agents and MFs though feel that investors will not mind paying entry loads to quality agents and financial planners who service them well. And apart from a miniscule portion of investors who invest through the internet, most find it tedious to visit MF offices every time they want to invest or withdraw.

Should you opt for no-loads?
We’ll say this unabashedly; if you’ve been reading Outlook Money, no-loads offer a better proposition unless you employ a financial planner that takes care of your entire portfolio.

But if you rely on these pages to guide you through the MF maze taking cues from picks, recommendations and Outlook Money annual mutual fund rankings and star ratings, a no-load option looks attractive. Plus, with the insurance regulator mandating insurance agents to provide additional transparency in disclosing costs to investors, it won’t be easy for agents to shift to selling unit linked insurance plans, from MFs.

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