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Sunday, August 30, 2009

MUTUAL FUNDS ABOLISHES ENTRY LOAD BUT EXIT LOAD DOUBLES

There is a good news for mutual fund investors. From August 2009 there would no entry load for investing in Mutual fund. Earlier whenever,except during the time of New Fund Offer (NFO), entry load amounting 2.% to 2.5% was a must. This amount was deducted, from the money given by investor to the Fund house, at the time of allotment of the units.The account statement reflected the deduction made by the fund house. Now there would be no deduction at all as there would be no entry load. This means If an investor invests Rs10,000/- the entire amount would be invested. Earlier money invested was Rs9800/- only though investor paid Rs 10,000/- So this is the happy news that there would be no entry load from now onward,

But always every good news is followed generally by a bad news. Now the bad news is that there would be now a higher exit load . The exit load was nothing new. It was there already.The exit load was required whenever investor is to take out the amount invested before one year. With the abolition of entry load the fund houses may increased the exit load. Till this year exit load was 1%. of money invested. Now it is understood that exit load have been brought up to 2% depending on amount of investment. A few fund house has already introduced the load as well as the period. in coming month. All others are also expect to hike the period and price.So it would be the responsibility of the investor to think over twice before leaving a fund before the specified time limit. My suggestion would be to read the offer document thoroughly before applying for investment .SEBI has already restrained Fund Houses not to charge varying amount of exit load from unit holders depending on quantum of investment. Earlier big investors were not charged any exit load. From now onward it would not be possible for Mutual fund Houses to give concession to big investors denying the small investors. This is a good step.

Shashikant Dubey,an expert of the mutual fund world, gave me another bad news for the investor. With the new provision of withdrawal of entry load the Mutual fund companies may extend the period of exit load. Up till now the exit load was required if an investor leave before one year. This one year's limitation would now probably be converted into two to three years period. That means once any investor joins a mutual fund he would not be able to leave the fund before two to three years without incurring penalty. Up-till now, these actions have not been taken by any Mutual fund but there is a possibility. Perhaps before publication of this article the confirmed news in this regards would be available.

So from now onward, before entering into mutual fund arena, it would be imperative for investors to read the offer document seriously and find out if there is any provision of exit load has been changed or not. I have again and again mentioned that investment is a serious job and none should enter the world of investment without properly understanding the schemes of investment. One needs to ask as many question to the financial advisor as he desires. The need of a qualified investment adviser would be necessary now, who would be truthful to the prospective investors .


The Entry loads were used by funds to help remunerate the fund distributor who serviced investors. Now, investor will have to separately pay the distributor for his services an amount that investor can mutually fix with him as fair payment for his services. The days of free services will go away from now onward. If you get free service then you should consider your self lucky. It would be like buying of air ticket from travel agent. Earlier no charges were imposed. Now a days travel agent charges money for the service rendered.

Apart from entry loads, there are some accompanying changes in the rules that investor must understand. There are no rules not to re fix the exit load .So the mutual fund companies in their exuberance to earn bqck the loss may impose suitably some charges through the exit load. My suggestion is investor must be aware of these points.So that they do not feel cheated later on. Mutual fund companies would be within their right to re-fix the exit load since there is no legal hindrance to do so.


The provision for enhancement of period of exit may do good to investor also. Because, most of the investors used to exit at the fall of sensex or Nifty. In fact this provision, if implemented, may turn out to be a savior for investor also. They would not be able to redeem immediately after the investment is made with out paying penalty. For the fear of payment of higher penalty at least some investors would keep holding back their investment and ultimately may reap benefit. For example, during the share market crash of January to June last year those investor , who had not taken out their investment and stayed with the fund, have regained their investment to a great extent by now. The increasing the length of exit period may help investors to be a long term player.
Probably, investors would be able to count on zero exit loads provided investment periods are longer than three years. These are early days and it’s possible that exit loads may evolve. Exit loads are going to acquire more importance now and one can expect some standardization across the industry sometime later.

. According some expert of the Mutual fund the way things are shaping up, it looks like fund companies will be paying distributors one per cent up front commission even though there’s no entry load. If the investor exits the fund within a year, then the commission gets compensated from the exit load. In any case, investors now need to be aware of the exit load factor, and stay put for longer period in the fund.


The most important factor from now onward would be to be aware of the churning of investment Though entry load has gone yet distributors may still be getting 1% percent commission. This does not harm investors. But investor must be aware that the motive for churning has not gone. In fact, from the point of view of an unscrupulous distribution organisation, a commission of one per cent instead of three simply means that they have to churn three times as much to earn the same revenues.

Fortunately, SEBI has also given investors a tool to protect themselves against this. Now,Distributors are obliged to reveal to investors what commissions fund companies pay them. They are even obliged to reveal what commissions competing fund companies would have paid them. In the run-up to August , this aspect of the new regulation has received the least attention. However, if investors are to benefit fully, then this transparency could prove to be the most important. What is needed is the education of the investors. The investor must read the documents and be aware of the entire fact and then can take their own decision to invest or not to invest at all. It would be prudent for investors to consult a qualified professional financial adviser for creation of their wealth in a most scientific manner.


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Anonymous said...

Dear Sir,

I understand that entry load is abolished and you also mentioned about fund houses not charging exit load in case investor remain invested for a longer period for ex. 2-3 years.

But I am wondering how Fund house will make money then? how's there expenses are covered?

Please enlighten me.

Thanks
Naresh