Mutual fund investors are clear winners after the regulator scrapped entry loads on investments from August 1 — but with a rider.
Fund houses have decided to pay to distributors upfront commissions ranging from 0.75 per cent to 1 per cent from future profits, thereby saving the investor from bearing the costs.
However, an exit load of 1 per cent is charged on investors if they exit before three years, enabling the funds to cushion the upfront charge.
“All mutual fund houses including ours have decided to pay commission from their future profit to be accrued as we understand that an investor does not like to pay such commissions directly,” said the marketing head of a large fund house, on condition of anonymity
While this would hit profitability, the decision to pay upfront commission is on the assumption that the money remains with fund houses for at least three years.
“The exit load of 1 per cent neutralises our position in case the investor exits the fund early,” said the CEO of a small fund house.
In all this investors are the real beneficiaries, as they won’t be paying an upfront commission as suggested by Sebi.
Sebi had in its circular said that upfront commission to distributors would be paid by the investor directly based on his assessment of various factors including the service rendered by the distributor.
“If the investor comes to us to put his money into a scheme and seeks no advise we will not charge anything. However, we have a charge structure if he seeks advice or asks for portfolio construction and financial planning,” said Rajiv Deep Bajaj, vice chairman and MD, Bajaj Capital.