Proposal for Waiver of entry load in Mutual Funds

There is a proposal by the Securities and Exchange Board of India (SEBI) to allow investment in Mutual Funds without any entry load if it is directly invested by the investor with the Mutual Fund house i.e. investor does not invest through a intermediary such as a bank, broker, financial consultant, Financial distributors etc

At present, the biggest MF distributors happen to be banks, with the top five accounting for 70% of the entire market of equity-related MFs. More than 50% of private banks’ revenues today come from fee-based income, which mainly comprises of selling MF and insurance products.

Some fund managers and CEOs feel the move has the potential to boost the insurance business at the cost of MFs. However, some others feel the move is very important as the waiver will benefit end investors. As there will be no commission received by the financial distributors, they may prefer selling insurance products as it is more lucrative in terms of commissions and products like ULIP are in any case sold by these distributors as a product that combines insurance and investment.

Selling MFs gives the distributor a commission of 2.5%, but distributors of insurance products, which include unit-linked insurance plans, can charge commissions up to 25 times that of MFs. Presently, there are around 60,000 AMFI-certified MF agents in the country compared with more than a million insurance agents.

The top 10 cities account for 80% of the mutual fund assets, according to a BCG report. The non-urban areas still are heavily invested in savings accounts and MFs find it a challenge to tap this market. Without the aid of distribution it will be difficult to tap this market. It is expensive for a MF to reach every corner of the country and in a country like India distributors are doing this for them at a low cost of 2.5%.

Thus, it becomes important for the industry now to concentrate on the non-urban areas to expand. If the entry load is waived, getting new business from small towns could get tough.