It is not just banning entry loads in haste by SEBI that has led to reduced interest in mutual funds. There are many other reasons which exchanges and SEBI tend to ignore
In August 2009, then Securities and Exchange Board of India chief, CB Bhave, introduced the ban on entry load. Nearly two years later, after an outflow of Rs19,549 crores from equity funds (between August 2009 and May 2011) and a decline of 22.61 lakh equity-oriented mutual fund accounts (April 2009 to March 2011), the new SEBI chief, UK Sinha, is planning to incentivise distributors in order to provide "organised and sustainable growth of the mutual fund industry".
This 'experiment' by SEBI has cost the fund industry dearly. But incentivising distributors is just part of the solution to the problem of fund flows. The fact is, retail investors are not interested in equity markets for a variety of reasons, a fact that the stock exchanges and SEBI refuse to acknowledge. SEBI will have to look into other issues as well, attract investors to the fund industry and the securities market as a whole.
One of the main objectives of SEBI is to regulate and develop the securities market. But the apex body has fallen short in doing that and Mr Sinha has admitted as much.
The entry load for mutual funds was banned in order to make it fairer. The move was intended to reduce the cost for investors. But, was the cost for starting investing the only reason for the lack of retail participation? Unfortunately, the SEBI board failed to look at other factors. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs, poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness. A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.
SEBI made the decision to ban entry load in haste, without adequate research, survey or discussions with investors. It failed to judge the cause of the problem. Will SEBI make the same mistake all over again?
We know that the number of equity folios has declined along with the huge redemption of funds, but is the lack of incentives to distributors the main cause for this? Unfortunately, there is no comprehensive research to support the case. For sure, this is one of the reasons, but the board has to address other issues as well.
The SEBI chief also plans to look into the regulation of distributors, disclosure of track record of fund managers by asset management companies, the break-up of institutional and retail money of fund houses and simplifying the KYC norms across its domain. These are good signs that the board intends to take active steps towards regulating the market. But whether the implementation of these plans will attract retail investors back is to be seen.
Moneylife has published numerous articles pointing out the declining retail participation in mutual funds. You may be interested to read: ("Retail interest in equity mutual funds is shrinking";) ("Huge mutual fund outflow points to a much deeper malaise")
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Roopsingh 7 seconds ago in reply to Rajivahuja
Dear sir Rajiv ahuja,why u blaming mutual fund advisors for selling ULIPS when debate is for entry load which exists in MF industry-why dont u ask IRDA to remove commission from LIC policies?
and why u blaming all MF advisors as culprits when SEBI has no gudelines for fund managers and their performance?better ask SEBI to make similar guidelines of preformance based renumeration for AMC guys and not to target distributors-
again u have been talking about commission as not a legitimate right of distributors-dear sirji please tell me a single product in the world where a professional or businessguy asks for 2 different cheques for a single service or product-have u ever paid 2 cheques to mobile shopwala one for Nokia co and other for shop owner?
have useen any salaried person asking his employers not to pay him salary but should go and ask his customers to pay him salary or service charge(i am not talking about undertable bribe).
if not anywhere in the world such system exists then why everyone asking to remove entry load-
and though MF advisors have not objected for dual system of direct and through distributor route-then why you bent on removal of entry load-
do you want to take all lunches free of cost (only for MF and you will pay all fees for other financial or professional services?)
Any moron will tell that when there is an incentive for performance, the performance will improve. Same applies to mutual fund industry too. Unless the guy who goes out in the market to sell the funds gets his dues, you can see no performance from him. Why should he? He is making the investor rich, mutual fund houses rich, the fund manager rich but he is left with nothing!!! Is there any other situation as skewed as this??
I still remember the time when entry load was abolished. I had recruited 6 fresh MBAs to market financial products in my firm. But unfortunately, even before they could join, I had to write regret letters informing that I could not take them on since there was no revenue generation from this activity. With Rs.15,000 as monthly salary plus the incentive, there was no way I could afford to take them in my company without relevant commission payouts. Consequently, 6 jobs that could have been created was lost.
Even now I am not hopeful about the incentive structure the SEBI Chairman is talking about. Once you make people used to free lunches, they do not want to pay for the same at a later date. Interesting scenarios in coming times. Let us wait and watch.
From where is this money coming to pay the salary & other benefits to the employees? From the consumers who pay for the product, right? Why not cut down the salaries & benefits so that the final product price is reduced thereby passing on the benefit to the end user???
Everyone needs to be compensated for the work they are doing. Somebody gets it in the form of Salary and some body gets it in the form of commission or brokerage.
and why u blaming all MF advisors as culprits when SEBI has no gudelines for fund managers and their performance?better ask SEBI to make similar guidelines of preformance based renumeration for AMC guys and not to target distributors-
again u have been talking about commission as not a legitimate right of distributors-dear sirji please tell me a single product in the world where a professional or businessguy asks for 2 different cheques for a single service or product-have u ever paid 2 cheques to mobile shopwala one for Nokia co and other for shop owner?
have useen any salaried person asking his employers not to pay him salary but should go and ask his customers to pay him salary or service charge(i am not talking about undertable bribe).
if not anywhere in the world such system exists then why everyone asking to remove entry load-
and though MF advisors have not objected for dual system of direct and through distributor route-then why you bent on removal of entry load-
do you want to take all lunches free of cost (only for MF and you will pay all fees for other financial or professional services?)
Same applies to financial advisory services too. SEBI, in all its foolishness, expected people to "pay" for the services they take from the distributors / advisors. We all know the result. The investors want someone to come to their doorstep, give them advice on the best funds available, collect the forms & cheque, service them at the time of redemption etc., But they dont want to pay the advisor! In a scenario like this, how does a distributor work??
There has to be some form of remunerating the distributor, if it is in the form of entry load, so be it.
We all have heard of malpractice etc of big banks and financial institutions. So the way forward is ban them from selling any financial products. Why should a bank, which is in the business of lending money and collecting deposits be in the business of selling financial products? Why should a post office sell mutual funds?? Ban them and automatically misselling will reduce.
But this is no reason for not giving an advisor what is his due.
By the way, I have asked this question of salary increment whenever someone talks of entry load. Till now no one has answered that question with logical reasoning!!!
When I said Free Lunch, the context was the free service given by the distributors to the investors. As of now, if I come to you to sell a mutual fund, I dont get any money from you directly. Entire amount of investment you do will get into the fund. When people are used to this free service, any fee based service, they will definitely oppose.
Expense ratio is altogether a different thing. The expenses incurred to run the fund house is setoff has to come from somewhere? Since investors are getting the benefit of the investment, it is only natural that they have to bear the expenses.
Distributors cried themselves hoarse that this was not the solution but you (the financial press) along with the Fund Houses chose not to see sense and ignored our voice.
Today when this move has back fired on the industry, Why are you still looking for other excuses to justify why the Mutual Fund Industry is bleeding?
Test the waters – Pay the distributor his rightful commission to get business (money back into the industry) then address the other issues.
The patient is in the ICU friend…Revive him first rather than have useless discussions around the coffee machine in the Hospital waiting room !!!
http://www.moneylife.in/article/cleaning...
Distributors were trying to make this point all along but no one supported thinking they were only addressing their personal income loss.
Just highlighting a bigger reality...
Not trying to run down "ML" Agree that it is one of the sane voices in the Financial Press