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‘Don’t Kill the MF Industry’

Distributors have taken SEBI to task for imposing a ban on entry loads

After the Securities and Exchange Board of India (SEBI) said that entry loads will be discontinued Value Research asked the very people who will be most affected by the move to give their reactions – the fund advisors.

Here are some samples:

Nanjundan: “The so-called rural investor will not get a chance to enter the market at all”

This move will de-establish mutual funds in India within a short time. We are a growing market and we need to mature over a period of time, but it’s too early for this kind of regulation.

Currently, the IFA community is the largest distribution network for the industry’s growth. Logically one needs to ask for a Rs 100 for a Rs 5,000 investment through a cheque. That means a customer needs to cut a double cheque and that is not free. Sometimes customers would underpay or might drag the payment.

This move is like nipping the bud in the early stages. The real loser will be investors because the advisors might opt for another product of his choice and at the end the so-called rural investor will not get a chance to enter the market at all. Mutual funds will remain only for the use of learned and not for the true Indians in our rural villages. Unless distributors can outreach MFs will only remain within the cities

Vijay M Mehta: “SEBI has legalized the system of pass-back of commission”

We have a strange habit of blindly implementing different practices prevalent in the US. Abolishing entry load is one such instance.

The logic being that the investor availing the services of the advisor will pay the charges directly to him rather than the AMC paying to the distributor. However, in their zeal to copy-paste the practice, the babudom at SEBI did not take ground realities into consideration. Investment advisory is not yet considered a profession in India and that’s why advisors are not being treated as professionals like doctors, lawyers etc.

Moreover, the practice of investor paying the advisor directly is practically impossible. For example, how would the advisor recover his charges in case of a monthly SIP? Should he charge the investor for the entire period of SIP? Or should he charge the investor after the debit has happened? There are bound to be defaults in payment of advisory charges!

SEBI in its effort to stop the system of pass-back of commission, has only legalised it and has in turn helped the big and corporate distributors rather then the marginal distributors who run their homes on such commissions!

SEBI's action will be only help bigger distributors consolidate their hold over the industry.

SEBI should not kill an industry and livelihood of millions of people in its effort to stop a malpractice.

Suresh Sharma: “MF industry has grown because of distributors”

I do not think that this is at all a good step from SEBI. In any business 2 per cent margin cannot be considered as very high. There are products like insurance where the margin for distributor is anyway in the range of 20-40 per cent. Why SEBI does not want to be a well-wisher for the insurance investor the way it is trying to be for MF investors? Whatever growth has happened in the mutual fund industry is because of distributors. I agree to the fact that there are advisors who do not guide the clients properly. But that cannot create the base for this step. Given the priority this should first happen with the insurance sector.

Soumen Bhowal: “SEBI has done its part, now it's investor’s turn”

SEBI’s move is not only bad for investors, but also for the future growth of MF industry. We expect a similar type of action from IRDA, particularly for ULIPs, to protect investor from mis-selling.

I personally feel coming days are crucial for MF industry.

AMCs might come up with new packages to attract distributors.

Majority of IFAs, who sell only for brokerage structure, may run away from MF industry to ULIPs, from where they can earn a lot.

Most of the distribution channel including banks and NBFCs might lose their interest in selling MFs.

MF industry will stabilize mostly for them, who actually provided services and sold only worthy schemes to investors as per their requirements, and only for those who updated their knowledge and way of doing business.

But the problem also lies with Indian investors and their mindset. Most of them will not be ready to pay even small amounts directly from their pocket, although they had paid more in past. Follow up would be an add-on job for distributor.

SEBI has done its part, now it's investor’s turn. Investment is not a part time job; selection of MF scheme is a research-based job. Investors have to take proactive decision whether to buy anything from near and dear one or to save entry load they can rely on tips or put little more time from their respective jobs or to rely on old ARN holder or take a final call to find and pay fees to honest capable financial planner, who can make you worthy. Not to forget even an odd extra per cent risk adjusted return per annum on your hard earn money adds a huge amount in long term.

Also read:
'It is Like Being Laid Off'
'Sebi's decision will be counter productive'
'SEBI Has Grudge Against Distributors'
'Investors Are Not Self-Motivated'