FROM 1 August, when you go to buy a mutual fund (MF), you will not have to pay upfront commission, or entry loads, as they are called, typically, around 2.25 per cent. These loads are commissions that are presently coming from the amount that you invest with your fund and get passed to your agent. But market regulator Securities and Exchange Board of India (Sebi) has mandated that your agent and you will now have to mutually decide upon an amount that you would like to pay him and he will also have to disclose his commission.
A sweeping impact...Understandably, agents are finding this tough to swallow. A senior manager of one of
He may be right, but comparing a financial product with a consumer durable is a stretch. It is true that as customers we do not, and are not qualified to, ask white goods salesmen pertinent questions about the products and swallow whatever sales pitch they throw. This, however, doesn’t mean that we have to be similarly unquestioning about our financial products as well.
Moreover, there is no doubt that commissions play a big role in any kind of sale. I hear that one of
MF distributors also claim that their income will drop significantly. That is true. Small-time agents will find the going tough, but only initially. In the new scenario, your agent will have to justify the fees he charges. By writing out two separate cheques, one for investment and one for the agent, investors will be aware of what they are paying for and, more importantly, how much. Discount brokers—those who merely give out forms with insignificant advice, will, and should, be wiped out.
With entry loads curbed, agent commissions could have been shifted to and clubbed with exit loads. But, as a pre-emptive tactic, Sebi has put a cap of 1 per cent on exit loads. This will prevent distributors from arm-twisting MFs into raising exit loads to compensate for the entry load losses, if any.
Value additions. What most agents and distributors fail to realise is that it is not as easy for an investor to make do without agents as it sounds. Picking and choosing the right fund from out of over a thousand available, filling multiple forms all by yourself, going to a Registrar & Transfer agent’s office before the cut-off time with as many forms and copies of PAN card and all the paraphernalia documents, isn’t easy at all. Even if one knows which fund to invest in, the paperwork and physically delivering the forms and supporting documents is itself a task. This last process may not be worth 2.25 per cent, but it sure is worth some charge.
What a discussion between investors and agents over commissions will do is that price discovery for various types of services, rather than a fl at fee for all, will now begin.