Mutual Fund Entry Load Controversy

Till date retail investors are charged an entry load of 2.25% on their investments in equity mutual funds. In case the investors fill their forms and submit them directly to the fund house there is no entry load applicable to them as it is assumed that they do not require any advice from agents/ distributor’s. An entry load is a charge levied by the fund house on investors which is utilised for payment of agent/ distributor's commission.



There exist different regulators for different investment options available in the market like RBI, SEBI, IRDA, PFRDA etc. Here SEBI has tried to bring transparency in payment of commission to mutual fund distributors. It has decided that there will be no entry load for existing or new mutual fund schemes.

There would be a fixed fee that shall be paid by the investor to the distributor directly. Moreover, the distributors shall disclose the commission, trail or otherwise, received by them.

Now what makes this judgement debatable:-

1. For people who do not require any advice for mutual fund investment’s, they already have the option and would continue to invest directly as per the direct investment rule earlier stated by SEBI and won’t attract any load on their investments.

2. If SEBI has regulated no load for equity schemes, its high time IRDA should also look into ULIP’s charging 3 to 50% charges in the first year. The charges are much more then mutual funds even in the following years till maturity.

3. This move will indirectly pinch the distributors to sell more ULIP’s rather than earning petty income from advising mutual funds. This will not be in investor’s interest and will affect the growth of the mutual fund industry.

4. This move will also give rise to a few already established distribution companies in the market who can afford low commissions to work on achieving higher targets by completing more and more applications of a similar fund or company. They won’t consider investors interest but will consider which fund house provides them higher miscellaneous benefits for advising their funds.

5. It is also possible that distributors start charging commissions in cash and don’t disclose it as their fees, in consultation with the investors and also they ignore showing it as their income while filling returns. The income tax authorities will earn less as currently the commissions earned by distributors are paid after deduction of tax.

6. If direct investments for mutual funds are possible then even insurance products should be sold without any charges. If you have the requisite knowledge about insurance policies available in the market and don’t require any advice, why should you pay high charges on insurance products?

7. Let’s consider similar case for a stock broker. If you do not take advice from a stock broker about the shares you purchase or sell then why should I pay brokerage to them. Capital markets are also regulated by SEBI for instance.

8. If an investor wants to start a Systematic Investment Plan for 5 years and each month a certain amount gets debited directly from his bank account. In such a case you are expecting a distributor to go door to door and collect the requisite fees each month as an LIC agent used to go door to door collecting premiums decades ago. Does this sound logical in an era where everything is automated and does this assure that distributors will be paid monthly fees?

This judgement is a win-win situation for the investors to a certain extent but I regret that they would be mis-sold policies that are not in line to achieving their financial goals. My sincere advice for the investors is ‘BE CAUTIOUS’ in the days to come.