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Thursday, October 21, 2010

Banning of entry load brought transparency in the Mutual Fund industry

Recent steps taken by Sebi to ban the entry load on MF purchase will attract more investors to capital market. Some regulations are yet to be formed to make the market more transparent; however this is definitely an important step towards the final goal.
Until August 2009, the MF investors were required to pay an entry load of 1-3% on every MF purchase. So if you were investing Rs. 1000 in an MF, at least Rs. 10-30 would go towards the advisory cost which the MF firm would collect to pay off the brokers. So, in effect you invested only Rs. 970- Rs. 990, which would see appropriate appreciation in due course. This obviously encouraged brokers to promote only those MFs that promised them the highest brokerage fee, thus ignoring the need for unbiased and informed advice.
Mutual Fund companies went into a panic mode when the entry load was banned by the protector of the Investors (sebi). Suddenly the chunk of thick pocket advisors moved away from selling mutual funds and turned towards money minting ULIPs (Unit linked insurance product). Then came the IRDA strict guidelines and caps on advisors spending- another wake up call !!!

One year down the line after many hustle –bustle investors have come back on their own or with the advisor’s guidance to save the Mutual Fund industry in India. This turn around is observed through the increasing number of SIP (Systematic Investment Plan) folios in the last one year. The ban of entry load has brought in the sense of responsibility in the advisors group as well as the Mutual Fund companies towards their fund performance, investors’ education to live up in this competitive market.
What just went wrong and again falling in place?
Mutual Fund is a product driven by group of investors to serve the best interest of investors through a transparent method to invest the pool of money to create long term wealth for the investors. In India, Mutual Fund is still in its nascent stage. Though Indian investors save more than 12% of their income, they are conservative in approach, they like to see consistency, predictability and transparency, where Mutual Fund though have tendency to give higher returns, can see a negative returns as well. In that scenario, when Indian equity market is growing 17% annual basis, still retail participation remained zilch. To increase investment in Mutual Funds, companies started paying handsome money to the investment advisors to push Mutual Fund products with more human touch. The greed of making money caught the advisors segment, who pushed the products with higher commission promised without paying much heed to the performance of the fund, credibility of the fund manager.
Things were good at the boom time, investors pumped in money, got returns on anything, but when market fell and crashed badly, thankfully SEBI woke up first to the investors’ cry and took the first step towards making Mutual Fund most competitive equity product. Indian economy is set to grow so as the market, then Indian Investors has all the right to get maximum benefit from the market.
So What Next !!
Now, through this stricter norms in all financial products, market is set to be more competitive and making it more level playing ground for the investors. Advisors are forced to do that extra bit of research to advice on good products, because they are gradually understanding the benefit of long term relations. The more steady the investors’ wealth grow, the better opportunity for the advisors and finally for the Indian Mutual Fund Industry as a whole. .
So, hail those laws and regulations which make Indian market more transparent, more regulated and most attractive in the world.
And Indian Investors – Smile On!!! :)

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