Mutual fund investors to pay transaction cost

In a volte-face from its earlier stand, the Securities and Exchange Board of India (SEBI) has imposed a new fee for investors in mutual funds. Existing investors dealing through distributors will now have to incur transaction cost of Rs100 for investments of Rs10,000 and above in mutual funds, while those making new investments would be charged Rs150.

However, there would be no transaction charge on direct transactions with mutual fund or transactions not related to new inflows.    

The move according to experts was prompted by need to incentivise distributors if the industry has to reach out to mass markets.

“Mutual funds in India are still required to be sold rather than being bought voluntarily by investors. The SEBI move seems to be a good one as it would incentivise distributors for their effort, help increase reach and attract more investors into mutual funds,” said Prithvi Haldea, chairman of Prime Database.

The mutual fund industry has been struggling to get new investors and retain existing ones post the entry load ban in September 2009.

The number of folios or individual accounts in the equity segment has shown a decline from 412 lakh as of September 2009 to 387 lakh as on June 2011, according to folio data collected from SEBI website.

The move may make transactions a little bit costlier but experts don’t see it as a substitute of entry load.

“The changes are positive for mutual fund industry as these would help to bring smaller investors back to markets. Transaction cost would help distributors to takes care of traveling expenses incurred in serving customers. It would be wrong to equate these costs with ‘entry load’ as its just small element as compared to entry load charges which used to go up to maximum of 2.5%,” said the CEO at domestic mutual fund house, not wishing to be named.

Even though there’s incentive for distributors, SEBI has also ensured that there’s some kind of regulation introduced for distributors.

“As a first step towards regulating distributors of Mutual Funds, selected distributors will be regulated through asset management companies (AMCs) by putting in place the due diligence process to be conducted by AMCs. I t is estimated that this measure will cover distributors handling about half of the total AUM in the industry,” said the SEBI circular.

“ Regulation of large distributors would ensure that they dont play dirty as historically there have been cases of mis selling by them,” said Haldea.

Among other changes, the SEBI board suggested guidelines for mutual fund advertisements to incorporate simplified returns and more granular disclosure of assets under manangement. also approved a framework for setting up of Infrastructure Debt Funds (IDFs) through amendment of SEBI Mutual Funds Regulations.