Saturday, August 8, 2009

New Rules of the Mutual Funds Game

These are interesting time in the Indian mutual funds (MF) industry. The market regulator, the securities and exchange board of India (Sebi) has been acting in a most proactive manner, quite unlike anything we've observed in the past. I've seen the regulator acting in the past too, but the way it has responded, post October-2008 crisis that delivered a giant blow to the MF industry, is a bit, you may say, admirable. As you must be knowing, after 1 August, entry loads are abolished. These were upfront charges- usually 2.25%- that were levied on you at the time of investing. So if you had invested Rs 100 in a MF, Rs 2.25 (2.25% of Rs 100) was deducted as entry load and the remaining Rs 97.75 was invested in the market. The entry load was eventually passed onto the the distributor as his commission.

Now Sebi has said that you- the investor- will have to sit with your agent and jointly decide the amount you'd like to pay him. You will need to account the quality of your distributor's advice and the service he provides and figure out an amount you'd like to pay him.

While we wait for various distributors to think it through and devise new costing strategies, the first ques are coming from online distributors. ICICI Direct ( has decided to charge Rs 100 per annum for a total investment amount of Rs 8 lakh. Kotak Securities has decided to offer MFs on its website for free. No charge. But in case if advisory services are wanted to get to know recommendations of which funds to buy, then Kotak securities will charge. It said that it will disclose such charges on its website in a month's time. Of course a free service is great, but even the charges imposed by ICICI Direct are most reasonable. For someone who wishes to buy and sell MFs on the net through one common window, these online brokerages offer a great service.

However, if you still wish to avail of your broker, you can continue to do so. Many brokers I know are offering to sell MFs free of charge. They aim to make money in trail fees. These are fees they earn on your investments till such time that you stay invested. It's also called loyalty bonus. But their total income that they used to earn from selling MFs will definitely take a hit, as most of them, in order to tackle competition, is charging NO LOAD. Customers too want free service.

I feel as customers, we must be considerate. Guy please understand, even if these agents do not give out much advice, even if they come to your house to pick up forms and deliver them to the registrar or the MF's offices, they are still doing some service. So what if it is just a courier service, but it is still a service. And for a service they need to be paid. Try going to the MF's offices yourself or even to your registrar's offices. You will need copies of PAN card, original PAN card and also Know-Your-Client (KYC) documents. It is a pain. It's easy, but a pain. If your agent is atleast doing all this for you, don't demand free service just because your agent's competitor is doing all this for you, for free.

True, for a courier service, he may not deserve 2.25% - the erstwhile norm for entry load that your all distributors used to get, irrespective for his service's quality. But he deserves something if he is giving you a service. A good regulation is one thing. But critics will always say that investors are not yet prepared. By demanding free services, we are giving fodder to critics and having eggs thrown at our faces. Let's own up some responsibility here too and start behaving in mature way.

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