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Investor alert: loads may return

india Updated: Jun 29, 2012 00:30 IST
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Bringing back loads on mutual funds will hurt investors, financial planners said. In fact, get rid of loads in insurance products as well, they added.

As Prime Minister Manmohan Singh took charge of the ministry of finance on Wednesday, he said he plans to resolve issues around the mutual funds industry and check the slowing down of the insurance sector. The industry read this as bringing back loads in mutual funds.

“Commissions must be increased for insurance products because there must be incentives to sell it,” Life Insurance Council secretary general SB Mathur told Hindustan Times. While insurance companies charge a commission, or load, of between 8% and 40% of premium, these have been abolished for mutual funds since August 2009.

“This (loads) is primarily revenue for the distributors and is front-loaded, which is not fair on consumers as the incentive for the agent to service and even renew the products is eroded,” Delhi-based financial planner Surya Bhatia said.

In different ways loads have been trying to make a comeback in mutual funds. In August 2011, capital markets regulator Securities and Exchange Board of India (SEBI) allowed mutual fund distributors to levy a subscription charge from investors.

This charge is Rs 100 per subscription for existing investors and Rs 150 for new investors. Financial planners called the move ‘backdoor return of loads’.

The idea behind no-loads is that if no value is offered to investors, she should not be forced to pay an embedded commission. But mutual funds have been lobbying the regulator and the finance ministry to bring back loads.

The bigger issue is that since insurance offers an unacceptably high commission, mutual funds have been moaning that nobody is selling their products. “There is a regulatory arbitrage between the mutual funds and the insurance regulator, where those who sell insurance get higher returns,” an industry insider said.

A careful look at data shows the opposite. Between March 2009 and March 2012, assets under management (AUM) of equity schemes — where loads have been done away with — rose by 45%. Clearly, investors have been buying their products in the absence of loads.

“The consumer doesn’t even know there is a commission involved while he is purchasing an insurance product,” the head of a mid-sized insurance company said. “Would he pay for advice? I doubt it.”

In 2009, a report by a panel headed by D Swarup, former chairman of Pension Fund Regulatory and Development Authority favoured banning payment of upfront commissions on all financial products.

Clearly, if the ministry goes ahead with re-introducing loads, investors have a lot to worry. It should make all financial products no-loads, instead.

Should entry loads be reintroduced in mutual funds?