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Self-Service Strategies

In this new era, a do-it-yourself approach can be very viable

It has now been a month since the Securities and Exchange Board of India’s (SEBI) new rule on the abolition of entry loads on mutual funds sales came into effect. As most investors should know by now, mutual funds no longer deduct an entry load from the amount invested. Earlier, this amount was used to pay most of the commission that funds disburse to the distributor who sold you the fund. From August 1 onwards, the entire amount that you write on the cheque is invested in your name - none of it is deducted for any purpose.

Of course, it's too early to see how the larger picture has worked out. There have been plenty of pessimistic projections about how distributors would stop selling funds and investors would stop investing in them. However, one month's time is not enough to make sense of any macro numbers about total investment inflows from different investors and different channels.

During this month, different distributors - and different types of distributors - have implemented different models for getting paid for the services they offer to investors. Investors need to be aware of the various alternatives and the pros and cons of each. Firstly, investors need to appreciate the fact that no entry load does not mean no commission. All that the SEBI’s new rule says is that fund companies must not deduct an entry load. Distributors can charge investors directly for their services.

Essentially, there are three models by which distributors can charge investors. They can charge a flat amount per investment. Or they can charge a percentage of the invested amount. Or they can charge nothing. All three are being tried, with some variations. The nothing option works only because fund companies are still paying commission to distributors - they are paying some amount of upfront commissions. Along with that, they will continue to pay the so-called trail commission which is mostly around 0.75 per cent per annum of the value of the funds.

Many distributors, including some very large ones appear to have reconciled themselves to this ground zero reality. My guess is that the free mode will come with some strings attached. The service and advice level is likely to be minimal. Also, the distributor could well be aiming to use funds as a loss leader to get you as a customer and then try and sell other, more lucrative products like unit linked insurance plans (ULIPs) where they can get fat commissions.

At the lower end, small and individual distributors are having a tough time trying to find the right level to charge. Typically, most of them do not offer meaningful advice but do offer great operational service. Since most of them are known to investors, their personal service levels tend to be substantially better than the larger and slicker outfits. If you are already dealing with such a distributor, you should recognise that he offers a real service and expect to pay him a fair fee for his time and effort.

At the other end of this marketplace, there are plenty of large distributors who are making a pitched attempt at continuing to charge a percentage that is close to what they were getting earlier. I know of at least a few foreign and Indian private banks that are continuing to give their wealth management and personalised-advise spiel. You should not entertain such claims. You should be paying a fair value, but the days of paying a full two per cent or so are gone. In fact, the days of paying the same percentage regardless of the amount invested are also gone.

My advice is that if you are a knowledgeable do-it-yourselfer (and since you are reading this publication, you probably are), then the best option is to make your own investment decisions. All you need is someone to service your decisions at a reasonable cost. Depending on your inclination, the best options could be a low-cost online broker, or a neighbourhood small-timer.