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Entry load ban completes one year

Mutual fund industry sheds Rs 90,000 cr in AUM as retail participation remains subdued

The mutual fund industry lost close to Rs 90,000 crore in asset under management (AUM) and over 600,000 equity folios over the past one year since the ban on entry load came into effect on August 1, 2009.

The removal of entry load led to a decline in sales of mutual fund schemes - mostly equity schemes as retail participation is highest in this category of fund - due to reluctance of distributors to push the products in absence of any incentives.

The AUM of the industry dropped from Rs 7,21,000 crore to Rs 6,30,000 crore between July 31, 2009 and June 30,2010. Though AUM of equity funds witnessed an increase of 15 per cent, experts say this is because of capital appreciation and not because of fresh inflows.

Sethuraman Iyer, chief investment officer, Shinsei Mutual Fund, said the equity category of the mutual fund industry has seen no action during the period. “Whatever appreciation in equity AUM was seen during the period, it was because of the growth in net asset value (NAV) of the funds. In normal situation, inflows into equity funds should have been very huge given the kind of growth we saw in equity markets,” he added.

In the past one year, benchmark indices - Sensex and Nifty - jumped 16-17 per cent, while the diversified equity funds saw an average growth in NAV of 28 per cent.

During the August 2009-June 2010 period, equity funds saw a net outflow of Rs 8,160 crore. During the corresponding period in 2008-09, one of the worst times for the Indian equity markets, equity funds registered a net inflow of Rs 1,996 crore. The Securities and Exchange Board of India (SEBI) banned entry load on sales of mutual fund schemes. Earlier, a 2.25 per cent entry load was deducted from the investment amount itself, and the same was used to pay the distributors. However, SEBI asked fund houses to stop paying distributors from the investment amount. It asked distributors to charge investors separately according to the services offered by them.

Mutual fund distributors feel that the ban on entry load has made it very tough for them to service retail customers. “Nobody likes to write two cheques, one for investment and other for distributor's fee,” said Satinder Kala, a Delhi-based independent financial advisor. This makes the business of selling mutual funds tougher for distributors and hence many small financial advisors are either shutting their shops or shifting to other financial products, where they get higher upfront commissions.

Aftermath of entry load ban
  31-Jul-09  30-Jun-10
Total AUM (in Rs cr) 721886 630185
Equity AUM (in Rs cr) 176593 203173
No. of equity folios 41202966* 4059368
*No. of folios as on Sep 30, 2009