Sucheta Dalal :Mutual fund entry load ban cripples equity schemes
Sucheta Dalal

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Mutual fund entry load ban cripples equity schemes  

January 7, 2010

Ever since the Securities and Exchange Board of India (SEBI) has banned the entry load for mutual fund schemes, fund companies have been suffering from a steady haemorrhage of cash in their equity schemes.


Here are some facts that will show you how badly this ban has affected the mutual fund industry. The ban on entry load took effect from 1st August last year. Between August 2009 and December 2009, when the Sensex was up 15%, the mutual fund industry saw a massive outflow of Rs7,315 crore. This is all the more galling for the fund industry, because mutual funds normally benefit from inflow of funds when the market is rising. Between March 2009 and July 2009 when the Sensex was up 88%, the fund industry saw an inflow of Rs7,429 crore.


Therefore, the continuous outflow of cash can only be attributed to SEBI’s order of banning entry loads and forcing fund distributors to make money by ‘advising’. Distributors have simply stopped selling funds. Indeed, when the Sensex came down crashing by 39% between April 2008-December 2008, the mutual fund industry still saw an inflow of Rs1,254 crore.


The truth is that, the ban on entry loads has dried up the distributors’ revenues and they are now asking investors to consider Unit-linked Insurance Plans (ULIPs) and company fixed deposits as the next best investment opportunity.


This is unfortunate because ULIPs are no better than funds unless they are held for a longer period and fixed deposits are unsecured. But the commissions on ULIPs and FDs are extremely attractive which is why distributors are pushing them.


Till July last year, the entry load used to come from the corpus of the fund which the distributors used to receive for pushing funds. However, SEBI mandated that investors have to pay the distributors directly for the services they get and it is up to them to negotiate what those services are and how much they should pay. This ban has severely affected the distributors—especially independent financial advisors—as they earned attractive fees. It has also brought down the number of new fund offers (NFOs). There have been just 22 NFOs since March last year when the long rally started taking the Sensex up by over 100%.
Swapnil Suvarna


-- Sucheta Dalal