My Feedback on Variable Load in MF

In continuation with my previous post on SEBI’s proposal for introducing Variable Entry Load in Mutual Funds, I sent in my response by email on the last day (6th of March). The response is as below:

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I personally welcome the proposal of having Variable Entry Load in MF.

This will bring in a rationalisation on the Commission earned by the Distributors which will be henceforth will be based on the Level of Service Provided by the Distributor to the Investor.

However the following issues need to be considered while bringing in this new regulation:

A. The Distributor Commission must be specified relative to the Entry Load. I.e., currently the Commission is directly specified in terms of % of Investment (say x %), hence forth it must be (Entry Load +/- x %). The Entry Load is what the Distributor & Investor agree upon and specify in the Application Form.

E.G. If today Distributor Commission is specified directly as 2% for a Scheme, with Variable Load it must be specified as (Entry Load + 0.5%) or (Entry Load + 0%), etc… This is at the discretion of the AMC & the Distributor.

B. Also in case of Option A. The Maximum Entry Load must be specified. It can be retained as the Current Entry Load of 2.25%. In the Application Form itself the Range must be specified (E.G.: Entry Load Range: 0% to 2.25%). This will ensure that even if there is an oversight on investor’s part the max. load can be 2.25% only.

C. Though the 2nd option for paying the Commission separately is good, but with the legal structure in our country enforcement of a separate contract is tough. AMC/Distributor cannot be sure that the Cheque given for Commission will be cleared.  Having a follow-up mechanism is cumbersome and time consuming.

D. Further, I would suggest at especially in case of High Value Investments (Rs.50,000/- and above), the AMC be held responsible for verification of the Risk Involved in the investment with the Investor Directly. This is to ensure that neither the AMC Official or the Distributor unduly influences the Investor into making any wrong investment without truly understanding about the risk element associated in general with MF and in particular with that scheme.

Hope the feedback received from the Public (positive & negative) will be shared openly to all.

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I wish to add the following:

In addition to the percentage entry load, there can be an option for absolute value. People are more comfortable with direct numbers rather than having to do the mental calculation to arrive at the numbers.

So probably we can have an option where the investor can specify the Entry Load in Terms of PERCENTAGE or absolute value (x% or Rs.x). But as earlier we must have a limit of 2.25% as the Maximum Entry Load.