SEBI bars mutual funds from charging entry load from investors

Mutual Funds (MFs) can no longer charge an entry load or a commission from investors starting 1 August according to a SEBI ruling.

Mutual Funds have been charging an entry load of 2-2.5 per cent and paying a commission of around 3 per cent to their distributors which required asset management companies (AMC) to pay between 50 to 100 basis points (bps) to distributors.

The fixed entry load structure meant distributors made a fixed amount on mutual funds irrespective of their performance and were therefore more inclined to push MF schemes even if the investor did not require it. This created a number of problems including constant movement across schemes which hindred long-term asset creation.

With the practice coming to a deserved end the investor will pay a fee to distributors and retain the option to negotiate it based on the quality of service provided.

With the new regulation, investors must now understand the negotiation part of the business as they are now required to negotiate with distributors on commission. Also there are some long term and short term implications for distributors and investors.

Distributors will now have to play the role of financial advisors to investors and not simply push products which forms the basic thrust behind the announcement.