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Return of Entry Load in Mutual Funds – Courtesy SEBI’s Sinha

July 29, 2011

SEBI’s current Chairman, Sinha is an ex-MutualFund Industry Captain [ Ex-Chairman of UTI AMC]. As expected, he has started the regime of favoring brokers again, though at modest levels. He ordered,

In order to help Mutual Funds penetrate into retail segment in smaller towns, the distributor would be allowed to charge Rs. 100 as transaction charge per subscription. No charge can be made for investments below Rs. 10,000. An additional amount of Rs. 50 can be charged to first time Mutual Fund investor.

What does Sinha’s Order mean ?
As usual, there is lot of ambiguity and we have to wait for clear guidelines from AMFI [I hate the way these Bureaucrats pass orders, oho well what can one expect from incompetent Government servants]

For example, if an investor wishes to invest Rs. 50,000, will he now make out a cheque for Rs. 50,100, of which Rs. 100 comes to you as the distributor or will the AMC invest Rs. 49,900 in the chosen scheme and pay you Rs. 100? Then again, how does one decide who is a first time investor in mutual funds?

On an investment of Rs.10,000, this works out to either 1% or 1.5% additional upfront commission – depending on whether the investor is an existing MF investor or a first time investor. If you are sourcing business from a first time investor, you stand to get 1.5% (on a transaction size of Rs. 10,000) in addition to the 0.5% upfront and another 0.5% first year trail that most AMCs give IFAs these days as commission. Your total 1st year commission to get a new investor into the industry works out to 2.5% – which is a very healthy and reasonable reward for your market development efforts on the retail side.

Will this result in multiple applications of Rs. 10,000 each in order to maximise distributor revenues? There is a fair chance this will happen – but frankly, if that is the way in which money can start coming back into the industry, perhaps the cost of multiple applications is a small price to pay to generate sales momentum.

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