Mutual Funds: Rule changes puts fund houses in a soup

Posted June 20, 2009 - 11:39 by isohelpline
Indian market regular SEBI announced series of measure to regulate mutual funds market. The measure and their effect is listed here:

No entry load for mutual funds (MF)
  • Investor will get full value invested in the fund. 
  • At present fund houses charge up to 2.5% as entry load. That means if you invest INR 10000, than only INR 9750 is invested in the fund while INR 250 is deducted as entry load.
  • Fund houses used entry load amount for marketing, sales, research and investor education (this is what they claim).
  • This also means no commission or very less commission to distributors. This will also reduce push sales by distributors as they were getting high commissions from some fund houses.
  • This may reduce industry growth, this is what fund houses say.
  • Distributors can charge the investor for suggesting right scheme. This will create environment for informed investment.

Anchor Investor in public issues
  • Eliminate or reduce fly-by-night operators
  • Increase IPO stability
  • Increase confidence in fund for other investors

Ban on Issue of shares with superior voting rights
  • Stop possible misuse as promoters used this instrument in the past to retain control over the fund through preferential allotment.

Less disclosure in rights offer
  • Faster completion for rights offer
  • Lower costs for rights offer

Lower regulatory fee for most market intermediaries
  • Lower operating cost for all (MF, FII, Brokers)
  • Benefit to investor (If at all lower cost is passed on)

Listing of IPO on at least one national exchange (BSE or NSE)
  • Easy sale of instrument
  • Better price in reselling
  • Mandatory even if listed on regional exchange.

These measures will no doubt are in the interest of investor but puts mutual funds managers in soup as they loose one of their best marketing tool, distributor commission. It is no secret that a distributor recommends one for which he/she gets better returns. A distributor rarely cares for interests of the investor.

Now, as a distributor can charge separate fees for his services, he will be more inclined to study the facts and recommend a better mutual fund to the investor.

Ones gain is others loss. Isn't it?

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