The Securities and Exchange Board of India’s decision to scrap entry loads on mutual funds has not gone down well with the mutual fund companies but they seem to have no strategy now to combat it. In the general body meeting of the Association of Mutual Funds in India (AMFI) held yesterday, members were supposed to discuss the issue but it ended with no clear action plan. There was supposed to be a special committee to discuss it but that proposal was given up eventually.
The SEBI directive, scrapping the entry load on mutual fund schemes took effect on August 2009. The AMFI meeting which lasted for several hours, saw members agitated about the directive. One of the courses of action was to set up a committee to take up the issue with SEBI. However, by the end of the meeting, the members decided the committee would be a futile effort, given the strong SEBI stance on the issue. When contacted by Moneylife, A P Kurian, Chairman, AMFI, refused to comment on the proceedings of the meeting claiming them to be “internal.”
Moneylife had earlier reported on how mutual fund companies are facing a hard time, given the new SEBI directive. The entry load, which ran as high as 6%, was earlier charged to the fund investors, that is the fund corpus itself. Ever since SEBI enacted this rule, New Fund Offerings (NFOs) are down to a trickle, despite the Sensex continuing to climb. The distributors, especially Independent Financial Advisors (IFAs), too have been left high and dry after the regulator abolished the load.
The mutual fund companies have kept the show going by paying out a 0.5% commission to advisors from their own fees; the larger distributors are being paid 1%. Some, like JM Financial Asset Management which have a poor long-term performance record, are even paying as much as 1.5% as upfront load plus 1% brokerage on systematic investment plan ( SIPs) and systematic transfer plan (STPs). Such a steep payout will affect the profitability as well as long-term survival of the asset management company (AMC). In the circumstances, the fund industry is even more focused on large corporate investments and has no interest in incurring the high cost of servicing retail investors. After the AMFI meeting, it seems that fund companies have completely fallen in line with the regulations. It remains to be seen what the smaller fund companies do.