SEBI plans to introduce transaction fee on MFs to incentivise agents, but will this move help in health anyone
Moneylife Digital Team 29 July 2011

The proposed fee (Rs100-Rs150 on investments above Rs10,000) might be too little to help agents—who find peddling ULIPs more lucrative

The Securities and Exchange Board of India (SEBI) plans to impose a transaction fee of Rs100-Rs150 on investments above Rs10,000 in mutual funds to incentivise brokers to sell schemes to investors. This transaction fee is another form of entry load which was banned by the earlier SEBI chief CB Bhave in August 2009. Since then there has been an exodus of nearly Rs20,000 crore from equity funds and a decline of nearly 22 lakh equity-oriented mutual fund accounts.

But could the ban on entry load be a major cause of such a huge outflow? For sure, there have been other factors which led investors to exit from participating in the market. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs (initial public offerings), poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness.

A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.

The regulator has failed to look into the other factors for poor retail participation. Without adequate research, survey or discussions with investors, is SEBI making the same mistake all over again?

The entry load for mutual funds was banned in order to make it fairer. "The investor is more important to the market than the distributor," said Mr Bhave at the announcement of the ban on entry loads. This decision never went down well with the fund industry. Distributors found fund-selling unviable and have been moving out of the business. The penetration of mutual funds is so poor that brokers had little incentive to sell mutual funds. The zero entry load was not motivating enough either for the investor to go in for mutual funds on their own.

SEBI chairman UK Sinha said that the transaction fee paid to distributors would help mutual funds penetrate the retail segment in smaller towns. But would it benefit agents, who, after the ban on entry load, opted for selling products like ULIPs (unit-linked insurance plans) which earned themselves higher commissions? The commission earned on ULIPs is still much higher than the measly Rs100, so will agents actively push mutual funds to customers? Investment in ULIPs start at around Rs10,000, therefore a customer having the finance would be pushed by the agent to go for a ULIP where "he will get a life insurance benefit as well".

This would earn the agent a higher commission and would defeat the purpose of the transaction fee planned to be introduced by the SEBI chief.

What about agents who don't sell ULIPs? During the time of entry load, there were numerous cases of distributor's hard selling mutual funds to hapless investors. The transaction fee may lead to the same practice distributors were following earlier.

The other changes SEBI has proposed-like simplifying the IPO form and providing a new format for opening a trading account that will require the investor to make only a single signature compared to the 50-odd signatures earlier, will allow investors to participate with ease. However, SEBI has overlooked the main problem of getting investors to participate in the market.

Comments
Mukesh Parikh
1 decade ago
SEBI introduced transaction fee to incentivize agents but in already down market where investors have disappeared.You will see that 95% of the agents will opt-out i.e. not agree to charge his investor Rs.100/150.
If SEBI wants to implement it, make it compulsory.
pankaj kapadia
1 decade ago
Call it entry load or trasaction charge it should be 5% on the investment made. Alongwith this rebating should be made legal. Let investor and distributor decide withing or above limit of 5%. It should be reduced from the investment amount and be stated in the form. It is fair to investor and distributor. There is transaparancy as sebi wants and compensation as distributors want. This will work with investors...
Keshav B Bhat
Replied to pankaj kapadia comment 1 decade ago
why SEBI should limit anything? as it is said let the investor and the distributor decide and mention the copansation to the distributor and mention in the application form and the amount to be deducted from the investment amount and given to distributor by the AMC. Those who dont want to pay the fee to the distributor can always do their investments directly.
Harish N
1 decade ago
This is neither going to help the cause of the distributors nor that of investors. Rs. 100/- now a days is not even peanuts. In any case, one who thinks that anything can be charged to investors certainly lives in fool's paradise.
Yash Verma
1 decade ago
Its a welcome move by SEBI. Though Rs 100/- is peanuts these days, but something is better than nothing. Mr Sinha is thinking right, unlike his predecessor. This amount should be gradually increased.
Prashant Bhawar
1 decade ago
Sir I think that this is very good design by SEBI for working MF adviser. And no entry load is very profitable in view of customer. In our town we charge fees for investment and customer don't have any obligation for such fees because he know very well that whatever we demand that is right and don't have hidden charges
Keshav B Bhat
Replied to Prashant Bhawar comment 1 decade ago
Dear Mr Prashantjee,
I do hear in mumbai also a lot of people saying they charge fee to their clients but in reality only a few client pay the fee to the services they received and maximum no of people do not mind if it is included in their investment but to pay separately to the services they think it is expansive and this mind set will not go out so eassyly as we indian want everything cheap or free. Even if they are ready to pay they beleive in bargaining rather than paying the reasonable fee asked by the service provider. ( Further i find some people who used to rebate even the gifts received for the ake of the bussiness are telling they r charging fee to the client, which is not digestible by any one who has seen their way of dealings). any way all the best.
Vikas Gupta
1 decade ago
Rs.100-150 Transcation is not going to help IFAs as once again it has to be charged by IFAs only. AMCs don't have any role in this. SEBI has already given liberty to IFAs that they can charge up to 5% from MF Investors according to the services rendered but a very few of us are able to charge our investors. So I doubt how many among us woul have the courage to apply the new Transcation Fees on our investors
KESHAV B BHAT
Replied to Vikas Gupta comment 1 decade ago
Dear Sir,
when Mr siha was heading the UTI, he was the main supporter of baning entry load and the UTI relationship managers used to encorage rebating by the IFA's, so what else you can expect by him just because he has become SEBI chairman?
Roopsingh
Replied to KESHAV B BHAT comment 1 decade ago
I agree to u fully and further i will add that Mr Sinha was staunch supporter of promotion of online facility at UTI offices,during his tenure custoemrs were regularly sent letters to register for online transactions via UTI portal and letters were sent for registering email and phone nos(i knew it will happen so i rarely used to submit these deatial in application form),
but when all his efforts failed he realised importance of distributors as important link to bring business,but still he gave only a lollipop of 100 Rs which looks more like a beggers bite rather then a professional fees.
i am sure this is not goping to help much to recover the damaged industry.
Gunalan
1 decade ago
Sir, There is an association called AMFI - Association of Mutual Funds of India headed by a Chairman. When there was a ho and cry that so much of vol. of amount had gone out of equity funds, what this is assn.is doing. Is it not a primary duty of this asson. to find the cause and rectify after taking up this issue with SEBI. " No entry load" was introduced and then Demat in MF was introduced. All these things are main cause. IF this being the case where is question of penetrating MF in small town. No advisor in MF industry can do free service. A noble laurette said "Nothing is free in the world." There should be appropriate incentive
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