SEBI asks fund houses to follow new guidelines

By SiliconIndia   |   Thursday, August 20, 2009   |    2 Comments
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Bangalore: The Securities and Exchange Board of India (SEBI) has ruled out rolling back its order banning entry load and parity in exit loads for all classes of investors. Domestic mutual funds, who were called for meeting by SEBI chairman CB Bhave to receive feedback on its recent decisions on entry and exit loads, returned empty hand. Bhave made it clear that industry would have to live with new norms, reports Economic Times. The fund houses explained that the industry was still in a nascent stage and imposition of stringent guidelines would stifle its growth, the market regulator told them to adjust within the new guidelines. According to fund officials, who attended the meeting, Bhave patiently heard out the issues related to the new commission structure, but reiterated that the new steps would only be beneficial for the long-term growth of the industry. Industry players, while admitting that the step was in the right direction, said that such developments were much ahead of their time. "Sebi's moves have moderated the distributors' compensation and they certainly are not happy. There is no overnight solution to this new development," said the CEO of a domestic mutual fund house, who requested for anonymity. Sebi had banned the entry load charged by fund houses from August 1. In the new regime, distributors would have to negotiate the commission with customers and be paid through a different cheque. Distributors would also have to disclose the commission they were being paid for similar products. The market regulator asked the fund houses to stop discriminating between high networth and retail investors and charge them the same exit load.
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Reader's comments(2)
1: With most regulators I think SEBI is going a great job along with RBI in regulating the market and having strict and accurate guidelines for the benefit of the investors and the confidence is always there. Wen I compare it with US or lets say North America I think what we have done is a tremendous job. Great work guys. Keep up the good work.
Posted by:Mayank Sahay - 20 Aug, 2009
Mayank - While the intent of SEBI may sound good and investor friendly, it is missing the big picture. Mutual Funds are supposed to be a Retail Product. Show me one Retail Industry that has grown without Intermediation... While the Mutual Fund Houses will continue to manufacture products, they don't have the wherewithal to reach out to the Retail Investors directly. Even if they wish to reach out directly, one MF House can at the best serve 5 to 10% of an Investor's requirements of financial products. The Investor will continue to need other MFs, Bonds, Equities, Small Savings Products, everything that his Distributor has been providing with. If you suddenly stop / reduce the Distributor's remuneration, there is no incentive for him to include MFs in the product basket he is offering to the investor, which will be the investor's loss.

The Upfront Loads have been removed by SEBI, however they were applicable mostly in case of Equity Funds, and were being charged at 2.25% of the investors' investment. It is a well known fact that Equity Funds are to be used for long-term financial planning and should be used as a wealth creation tool. If you pick up any good diversified equity funds with a track record of 10 years or more in India, you will see that they have delivered returns in excess of 20% p.a., creating huge amount of wealth for the investors. A one time entry load of 2.25% tanamounts to 0.225% if you amortize it over 10 years. How does it matter if your return was 20% p.a. or 19.775% p.a.?

On the other hand, there are so many costs in competing products that are hidden from the investors, and he does not realize what he is paying. The transparency of Mutual Funds unfortunately has become its bane too....
Nikhil Karnik Replied to: Mayank Sahay - 21 Aug, 2009
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