Transparency in MF Investments

With a view to enforce transparency in Mutual Fund transactions, SEBI vide their order dated 18th June 2009 has proposed as under:

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors."

This ruling is going to have far reaching consequences for MF investments in India. While the distributors are up in arms against the SEBI order, retail investors are confused about its impact on their pocket. Let us try to understand the impact of this order:

• Indian Investors are largely dependent upon distributors for their investment needs. Last year SEBI had allowed investors the benefit of 'No entry load' for direct investments through the fund houses. Despite this benefit, less than 5% MF investments have been routed through the direct route. The apprehension of distributors losing out on business is thus quite unfounded.
• Another apprehension is that investors may not be matured enough to understand the meaning of upfront fee. The relationship between the investor and the advisor is based on trust, and as long as the trust is maintained it may not be difficult to charge an upfront fee, like the brokerage in the case of equity investment. However, it will put the onus of record keeping of the commission earned on the distributor.
• The level of advice to the investor may suffer, as the distributor may be inclined to sell MF schemes of large fund houses offering him higher 'trail commission'. But since disclosure of trail commission is also being made mandatory, the investor can decide after taking a view.
• Initially, schemes like ULIP may score over MF schemes, as distributors continue to get higher commissions on these schemes. There is an urgent need to allow a level playing field by improving transparency of ULIP schemes, which fall under the purview of the insurance regulator (IRDA).

The SEBI move is likely to benefit all the market participants in the long run, after the initial hiccups. However, the need for investor education at this stage is very high, to enable the investor to understand the implication of the recent changes, and to ensure movement to the new regime in a smooth manner.