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Mutual fund rule changes to help investors

On the 18th of this month, two key changes were initiated in the regulations governing mutual funds in India. One, SEBI abolished the practice of ‘entry load’—the upfront sales commission—in mutual funds. Dhirendra Kumar writes.

india Updated: Jun 24, 2009 23:17 IST

On the 18th of this month, two key changes were initiated in the regulations governing mutual funds in India. One, SEBI abolished the practice of ‘entry load’—the upfront sales commission—in mutual funds.

And two, it was reported that the government would somewhat loosen the Know Your Customer (KYC) requirements for small investments made through the SIP (systematic investment plan) route.

Both of these are significant changes that will alter the fund investment landscape in the country.

According to a statement from the fund industry association’s (AMFI) chairman, the KYC requirements for SIP investments totalling less than Rs 50,000 a year need not include the investor having a PAN card.

Perched in a certain position, most of us who read this newspaper probably think that having a PAN card is now universal in India. There are a huge number of people who earn around Rs 50,000 every year and could be saving Rs 500 or a little more every month. However, it simply isn’t worthwhile or even practical for them to get a PAN card made.

These people who are unlikely to launder money (the purpose behind the KYC rule was to prevent money laundering) and should never be subjected to such provisions. The freeing of PAN requirement at the bottom of the pyramid will help democratise mutual fund investments.

The other big change that SEBI has brought in is the abolishment of entry load on mutual fund investments. Entry load is an amount deducted by the fund that goes towards paying commission for the distributor who sells a fund. Now, the distributor will be paid by the fund companies out of its own pocket, while the investor and distributor will negotiate fair fees separately based on services and advice rendered. This may put small or individual distributors in trouble, but I think it is in the overall interest of investors.

The crooked distributors will flourish in other ways, but the straight ones will have to work hard to survive and create a new business model. Hopefully, the fund companies will help them do this.

For investors, the biggest positive impact will be that ‘churning’ of investments could end.

Dhirendra Kumar is Managing director, Value Research