February 15, 2010 by akhilendra

Dilemma surrounding investment in mutual funds

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Recently, there was a change in the way mutual funds were being sold in India. Entry load has been removed now which means the entire amount a investor invest in a fund is reflected in the statement. It doesn’t sound big, but this move of removing entry load has completely changed the mutual fund industry in India. Mutual funds were mainly sold by the small financial advisors and brokers, who were getting commission from mutual fund houses. This commission was being derived from this entry load. Now, as there is no entry load, it has impacted the entire mutual fund industry. Mutual fund houses use to charge around 2.25 percent of the invested amount as entry load and companies use to pay commission from this 2.25 percent, sometimes a fraction of this and sometimes, the entire 2.25 percent.

It has helped investors as entire amount invested by them is reflected in their statement. It will reduce the investment cost. As result of this move, small financial advisors are now turning away from the sale of mutual funds. It is going adversely effect small investors also because now agents would be giving more preferences to big investors. Mutual fund companies are also finding it hard to encourage these small sale agents to sell their schemes. They are trying to come up with some new distribution policy to help these agents. Doing business in this case mean selling mutual fund require some expense and if the agents are not able to recover their cost, they are not going to continue this.

Entry load was basically removed to help investors as it will not only reduce their cost, but also reduce mis-selling. Earlier, to get their commission, agents use to encourage investors to withdraw from their existing holdings and invest in new schemes. Though, market expert believe it may not wipe away the mis-selling. Because now these agents will investors to invest in those instruments which offer them higher commissions like life insurance policies.

Currently, many companies are paying commissions from their own kitty but it may not be sustainable option. When market conditions are favorable, they may afford this but may fail to sustain this under adverse market conditions. Whatever might be the end of this hazy situation, it is going to effect entire industry. It is very important to preserve sales agent’s interest otherwise it will severely impact investors also. These commissions are the source of livelihood of the agents and in business of investment; the most important factor is the right advice. If investors get right advice, these minor charges can be covered by the returns which will be generated on a good investment. And if an agent fails to make good living out of this business, they may opt out this. So, it is very important for companies and regulators to look into this and come up with some alternative to maintain the source of the income for agents.

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