The entry load -- 2.25 per cent commission paid to distributors of mutual funds -- was banned in 2009 by former Sebi chief CB Bhave
No sooner did the Prime Minister sound out his discomfort with the sluggishness of the financial markets and express his desire to add some zing to these important wings of the economy, the mutual fund industry went head over heels to demand re-introduction of entry load on mutual fund investment, which Sebi had banned in 2009.
Such was the desperation to revive the markets that some finance ministry official even went on to say that they will soon advise the mutual fund industry and Sebi to consider re-introduction of the commission for brokers.
The entry load -- 2.25 per cent commission paid to distributors of mutual funds -- was banned in 2009 by former Sebi chief CB Bhave, who felt that investors were being taken for a ride by distributors who encouraged investors to churn their portfolios. The ban, however, led to drying up of inflows into mutual funds.
The prime minister had earlier last week said that there were problems facing the mutual fund industry that needed to be resolved.
The ban on entry load has resulted in lower incentive for distributors, who usually push a product in their bid to earn higher commissions.
Lesser investment in mutual fund products and other saving instruments have prompted higher money flow to gold, which has pushed up the current account deficit of the country due to rising imports of the commodity.
To restrict the investment flow to gold, which is considered as a dead investment, the government is now planning to make mutual fund schemes attractive for retail investors.
Retail participation in equity related schemes have come down in the recent past on the back of volatility in stock market.
According to SEBI data, equity funds lost 4.86 lakh folios in April and May. While there were 3.76 crore folios as on March 2012, which fell to 3.71 crore in May 2012, equity assets also fell 6 per cent from Rs 1.82 lakh crore to Rs 1.70 lakh crore during this period.
According to industry experts, reintroduction of entry load along with good performance of share market is likely to increase retail investors' participation in the mututal fund schemes.
But should Sebi, or the government for that matter, go for such a step? Not really. Here is why. For one, the miseries of the mutual fund industry are not unique to that industry alone. The entire capital market has seen sluggishness in fund flows because of depressed outlook. No investor wants his/her money to simply remain parked in an asset class without earning any return. Worse still, global cues and the status quoist situation in the domestic economy, in fact, pose a risk of eroding wealth. If inflows to the mutual fund industry has been sluggish, the economic depression is to blame for it.
Secondly, the entry load ban was widely seen as a customer-friendly measure. And once customers have got used to it, any reversal of the same measure will mostly likely have a reverse impact on customer approach towards this product.
Thirdly, one of the single biggest reason behind the sluggishness of the mutual fund industry has been its inability to perform. The new Sebi chairman, UK Sinha, has in fact gone on record, saying
there were at least 11 fund houses where most of the schemes were not even being able to meet their benchmark in terms of performance. If non-performance is
one of the reasons that has halted fund flow to mutual fund schemes, then the reversal of entry load ban as a step towards boosting investment in the industry will be widely seen as rewarding non-performance.
Fourthly, the entry load ban had forced an otherwise urban-oriented mutual fund industry to spread out and enlarge its base. You had suddenly heard of a push through banks to sell mutual fund units in rural areas. There were also awareness drives across the hinterland to take these products to the people who have remained out of the scheme of things so far. The reversal of the entry load ban will also reverse this process of financial inclusion.
Last, but not the least, like all other segments of the financial markets, the mutual fund industry needs to slog its way to growth. If insurers were forced to withdraw excessive charges on Ulip management and their product offerings disclined so strictly to ensure customer protection, why should one industry get undue benefits, simply because someone is shouting from the rooftop?