August 2009 is when SEBI abolished entry load on mutual funds but did it actually benefit the common man? I don’t think so. You may ask Why? And even argue that – I do not pay anything for buying mutual funds which means that I am benefiting a lot. May sound true but … let us see if it actually benefiting common man or not.
August 2009 is when SEBI abolished entry load on mutual funds but did it actually benefit the common man?
I don’t think so.
You may ask Why? And even argue that – I do not pay anything for buying mutual funds which means that I am benefiting a lot. May sound true but … let us see if it actually benefiting common man or not.
Normally I do not visit my bank but last week I happen to visit my bank aka HDFCBank and as I entered I saw one big change. I saw that May I help You desk was used to be full of mutual fund forms and now they are all insurance forms. This is something expected. You showcase products that make you profit but then … As expected like every person visiting the branch I was also asked to do some investment. I thought let me see what they offer me and you will be astonished to know that when I talked about mutual funds the sales person told that mutual funds do not perform well these days. I asked about HDFC’s best performing funds (I am in HDFC Bank remember) and they quoted me that these fund performances are of past and it is written on the mutual fund reports that they may not be maintained in future.
Now I wanted to investigate if this is a one of case or is a common practice and I found that it is a common practice especially by banks to do mis-selling.
Now let us say any common man with very little knowledge about mutual funds wants to invest small amount i.e in range of 10,000 to 25,000. He visits his bank. Now bank representative will make sure he does not invest in mutual funds but goes for insurance which according to me is the worst possible investment option.
Do you still think SEBI’s decision to abolish mutual fund entry load is benefiting common man? Share your views in comments below.
What you are basically asking is that this pro-consumer step of helping more money to go to the MF (abolishing entry load) & thus increasing the returns to a customer is bad because the banks are not making money on the same!
An amazing feat of mis-logic.
Instead, we should be asking lesser commissions on other mis-sold products like ULIPs.
Shabbir Bhimani says
No I am saying, people who are not aware of good products are even kept away from those brokers where they have least interest and is best for investors. Of course products like ULIPs should not have high brokerage either.
In the modern days, we don’t have time to Analayse which prduct is good so the the distributor will give top 10 schemes from that we can decide to invest in good scheme.
Due to this entry load waiver distributors are not much interest to promote the product.
However they can charge the load from the investor but there is no limit it will affect the small investor.
More than just the not so profitable suggestions I think investors are facing service issues. There are a lot of customers who don’t seem to be get the basic help required to service the queries.
Financial planning says
There is an option to the investor to invest directly, without incurring entry load. She has to walk in to the respective mutual fund office or do it on line. Fund houses will not levy any entry load directly or indirectly. Only investor will have access to the information.
DR Ram says
YES IT IS BENEFITING.
Sachin Gupta says
I agree that in India people lack financial literacy and Sebi’s decision has increased the problem of MF houses. In that light what you are proposing is quite correct. But I am a great Fan of Sebi, as it had from the very beginning thought of long term interest of the investors.
The real problem here is that one of our regulator is allowing high fees for a similar product (ULIP) so that major players(banks) are willing to sell the same. This has been a pertinent problem for the MF houses, as low distribution fees in comparison to insurance product have not allowed them to develop proper supply chain and develop large retail customer base.
You can always develop a similar portfolio as a Ulip with mutual funds and only life cover. Such a solution is always cheaper and perhaps of this Shabbir is a great fan of MF.
Also, Thanks Shabbir for reiterating the importance of entry loads in short term. This is one of the major points that we miss many times looking for long term.
Shabbir Bhimani says
Sachin, Yes I do agree that ULIP allows such a bad fee structure for investors and yes problem to an extent can be eradicated with the similar laws to ULIPs
Similar experience with HDFC as well as ICICI.I had gone to invest for tax saving purpose.And they were hell-bent upon convincing me to invest into ULIPs rather than ELSS. when i asked them to explain the ulip plan i was attended to immediately, but as soon as i asked them to tell me about the ELSS, i was kept waiting for quite some time and later that fellow too suggested me to invest into the ULIP. Sad state !!
Ameya Phadke says
I partially agree with you on this.
Per my assumption, the entry load was basically used for MF Advisor/Agent’s commission and hence irrespective of that MF’s future performance, the agent used to get his brokerage on time. I am not sure, if the MF Agent used to study or do the “Real” analysis of the fund before selling it to the investor.
An Investor (at least I) used to invest after hearing my Agent’s advice on it.
Nowadays, My Agent has stopped uttering a word about MF Investments.
So the Investor, who is busy in his daily routine and can not do the real analysis, is not getting enough information about New Fund offers and performing Funds (unless he reads your articles) etc.
So instead of banning Entry Load, they (SEBI/MF Regulator) should design such an Instrument or Policy Rule that would give those Agents their brokerage only on performing MFs or in other words, they should get paid only if an Investor gets some profit after that investment
e.g. Instead of giving Flat 10% (pure assumption)Brokerage at the start, the Agent should get his commission only after First Dividend declared and/or after every subsequent dividend declared etc.
I know that would be difficult or Impossible; however by adopting such kind of policy, the MF Agent would certainly do Real analysis, before offering that fund to the Investor and Agent’s interest in selling the MFs would still remain intact. This would certainly benefit the Investor as well.
But I have made a good money in ULIPs (HDFC Std Life) , now that the charges are also reduced you have a good chance to earn if you invest a good amount. I exercise the switch option to increase my Units. Pl comment if there is any future for ULIPs
Sachin Gupta says
I agree to your view in a narrow sense. If you think of the investors who change their investment decisions based on the helpdesk support, you are looking at very naive investors. In case the entry load was present, even then the banks would have sold products beneficial to itself rather to these customer. As a result banks would always had the tendency to push insurance products.
But one thing that this thing has definitely done is to make the fees for financial advice explicit. By doing so any person looking for financial advice will look out for value addition and will evaluate financial service provider based on his expertise. It had removed the discrepancy where a good financial guide and bad guide were getting the same returns. A good enough reason to motivate people to provide better financial advisory services. It takes time for such service organizations to come and establish themselves. I hope in year or two more the market will mature.
Shabbir Bhimani says
Sachin, we are still in India where investment decisions are not done by individuals.
Chandra Kiran says
I agree with your views. Now a days, they are showcasing ULIPs as the Best investment option ever in the world. Onetime in the past, one guy told me that Mutual Funds are outdated investment options, now everybody is going for ULIPs coz it covers insurance and investment… I am not sure how much they’ll give returns… 🙂