Waiver of entry load on direct Mutual Fund applications
September 11, 2007
This is a rather astonishing, personal account from a high networth individual and an example of how callously the fund industry treats investors. Is it any wonder that the business is growing only very slowly?
By Uday Thakurdesai
There have been many reactions to the Securities and Exchange Board of India’s (SEBI) proposal to scrap the load for direct applications to mutual funds. This is in reaction to complaints that distributors are the only beneficiaries of high entry loads and the business is so skewed that the Fund industry is keener on wooing distributors rather than investors.
As an investor, I find that many mutual funds do not care for about investors once their money is collected. One of the funds in which I have invested rejected my application to switch from one equity scheme to another because my PAN proof was not submitted. By this rejection I stood to lose money depending on the NAV on a given date. I had retained evidence of the registrar's email communication to me (given to me only on my insistence) that PAN proof had been submitted and verified. Ultimately, the transaction was recorded on the date of original instruction, after exchanging several emails with the fund and only after escalating the matter to the CEO explaining the matter to him. His reaction was to ask me what I expected of him.
This will not happen if an investor can exit his equity investment in one fund house to another, in the same manner that we expect number portability to work in future. Today, a switch involves an entry load of 2.25%. For an investor with a 25 lakh investment in a Fund, the cost of shifting works out to Rs. 56,250. This is a very steep at a time when he has not changed his outlook on the markets. It also prevents investors from voting with their feet if the fund is not performing up to expectation. It is only when this is allowed, at no additional cost to the investor that Mutual Funds will want to deliver top quality service.
Entry loads for new schemes are, in fact, a deterrent to high quality service; hence investors need the option of exploring entry load-free investment into equities. The regulator must also ensure that mutual funds do not substitute entry loads with exit loads leading to the same deterrent.
The scrapping of entry loads will certainly indeed cause distributors to lose some of their lucrative earnings. Yet, their argument that loads are even higher in the overseas markets is totally irrelevant. There are many features of overseas markets that are not replicated in India.
Service charges for shifting
The levy of service charges for shifting investments from one scheme to another, but within the same Fund House, is another variation of loads. A transaction charge of say Rs 100 for each switch within a fund house may be acceptable, but not a percentage of the total investment. The problem is, that service charges are levied as a percentage of the value of transaction, much the same way as entry loads. One mutual fund levies a service charge even for shifting from an equity fund to a debt fund, although entry into the fund is otherwise free of load. Obviously, mutual funds too will lose this income once he has the option of switch his equity investments at zero cost to another Fund house.
Why only entry loads?
It would be interesting if SEBI took the lead in publishing the information relating to the profits made by the AMCs. The quality of service rendered by them is abysmally poor making one wonder if they really ‘earn’ these profits. Here are a few examples:
In one case, my redemption instruction for a sizeable sum of money was rejected by a fund on the ground that it had not been signed by all the joint holders. It was indeed my mistake as I had not cared to check the master information on the account statement and continued to believe that the account was to be operated on ‘any one or survivor’ basis like all other accounts in the family. As the proceeds of redemption from liquid funds are credited to the bank account on Day 2, I went to check my account on Day 3. Not finding the redemption credit, I called up the Fund whereupon I was told why the money was not credited. Couldn’t I have been informed? Fortunately, there was no urgency but imagine my plight if I needed the money to pay off hospital bills! Both my numbers, landline as well as mobile, were registered with the Fund but no one cared to call up to inform me that my instruction was being rejected. Not even an email communication, even though my email address is registered with the Fund. When I questioned them, they said it was not ‘the industry practice’. I must mention here that my bankers have never failed to give me a call whenever they found that a cheque issued by me could not be honoured for want of funds. It is another matter that on each occasion I proved to them that the necessary funds were readily available in my account thereby obviating a lot of unnecessary hassles that would have occurred if they had not called me.
Not a single mutual fund, without any exception, bothers to confirm that PAN proof has been accepted and taken on record. However, investment instructions are rejected with remarkable alacrity for want of PAN proof, even if the mistake is on part of the registrar (as elaborated above). Is it too much to expect funds to send remind investors who have not met PAN requirements?
In one of my equity investments, I changed the dividend option from ‘payout’ to ‘reinvest’. I got a confirmation of the change from the registrars. However, when dividend was declared, it was duly credited to my bank account without registering the change in option. On enquiry, I was told that the dividend amount exceeded Rs. 50,000 and hence could not be reinvested, since I had not submitted the PAN proofs. I proved to them that the PAN proofs had been submitted. The following questions readily come to my mind – (a) should the Fund not have asked for such proof at the time of the change in option? (b) If it forgot to do so, should it not have asked for the proof at the time of dividend payment, instead of unilaterally flouting specific instructions from the investor? And isn’t it reducing its own Assets Under Management by doing so? (c) If an investor may has submitted proof in 2005 but makes a further investment only in 2007; should he be expected to retain the acknowledgement of PAN proof submission only because the funds are callous and have poor systems? Mutual fund claim modern systems, but do not even make effective use of email addresses to communicate with investors. At least three mutual funds have changed their office premises in Pune, but NOT ONE of them cared to email investors about the change. They obviously believe it is the distributors to do so.
Personally, I do not advise innocent investors to investment in mutual funds because of their poor service quality. Consequently, mutual funds lean heavily on distributors to expand their business and AUMs. After all, feedback from existing customers cannot be very positive. The BOTTOM LINE is that MUTUAL FUNDS TREAT DISTRIBUTORS AS THEIR REAL CUSTOMERS, NOT THE ULTIMATE INVESTORS. THIS HAS TO CHANGE FORTHWITH.
The role of regulation
SEBI as the regulator should be asking itself is whether it requires regulation to bring about improvement. I believe not. Instead, Mutual Funds must prepare and accept a code of conduct in their dealings, which should be approved by the regulator. Once the code is implemented, any flouting of the code should be referred to an ombudsman or a similar independent person/body. All decisions/ references by this body must be posted on SEBI’s website and this effort must be adequately publicized, so that investors are encouraged to raise issues and developments. It may also be a good idea to rate Fund Houses and publish such ratings on SEBI’s website. The threat of negative publicity would push fund houses to improve service quality. In the 1990s, SEBI used to publish the names of companies with the maximum investor complaints. This action led to all good companies ensuring that their names did not figure on the list by resolving pending complaints quickly. Much the same is likely to happen with this proposed system. Such action will also increase competition between the Fund Houses. Once the appropriate environment is created, they are likely to vie with each other in offering improved services. Again, the example of telecom services comes readily to mind – Reliance set the price of call, which the competition was forced to follow. No amount of regulation would have been able to achieve this outcome. SEBI’s job is, therefore, cut out. Create an environment in which the mutual funds will find it necessary to compete with each other on quality parameters thereby making any regulation redundant. Email: [email protected]