Entry load for mutual funds (MFs) – How SEBIs move positively impacts you
In a welcome move, SEBI has totally abolished the entry load charged by mutual funds (MFs) effective August 1, 2009. Read on to know how this impacts you. This applies to all MF units purchased after 1st August, and in any form: Purchase of units in an existing MF scheme where you don’t hold any units already Purchase of units in an existing MF scheme where you already hold some units. Switch over from one MF scheme to another New MF schemes Systematic Investment Plans (SIP).
So, why is this so great for you? Read on.
Impact of entry load
Entry load is an upfront charge levied by fund houses when you invest in various MF schemes. This load used to vary from 0% to 2.5%. This load was charged (supposedly) to compensate the MF houses for marketing and distribution costs. The charging of entry load resulted in less of your money being invested in an MF scheme. Let’s say you invest Rs. 5,000 every month in an MF scheme. If there is an entry load of 2%, Rs. 100 would be deducted upfront from your investment. That is, instead of the full Rs. 5,000, only Rs. 4,900 is actually invested in the fund. (You think such a small amount wouldn’t matter? Absolutely wrong – read further for some eye opening facts!)
Positive result of this move
So, why is the removal of entry load such a great move? How does it impact you?
Higher returns for the same investment
If you are a regular and long term investor in equities, this move gives you tremendous benefits.
Let’s understand this using an example.
You invest Rs. 5,000 every month in an MF scheme. If there is an entry load of 2%, only Rs. 4,900 would be invested in the fund. If there is no entry load, Rs. 5,000 would be invested for you. Let’s also assume that you continue this SIP for 5 years. You get an average return of 15%. Your total investment over 5 years would be Rs. 3,00,000. What would you get at the end of the 5 years in each case?
When an entry load of 2% is charged, your investment grows to Rs. 9,25,980 at the end of 5 years. When no entry load is charged, the same investment grows to Rs. 9,44,878.
That is a difference of Rs. 18,898. On your investment of Rs. 3,00,000, this turns out to be about 6.3%.
And remember – this 6.3% extra is totally free! You don’t have to do anything extra for this. You used to pay this to the fund house – now, you would get it!
Lesser advice to churn your portfolio
From time to time, most MF agents (many guised as “investment advisors”) ask you to sell a particular fund that you hold, and ask you to purchase something else instead. The reason stated is: the fund you are holding is “underperforming”, and the other fund can give you better returns. This might be true some times, but many times, you get this advice because when you buy a new fund, the MF agent gets a fresh commission! Yes, from your entry load!
Now that there is no entry load, hopefully, these mutual fund agents would not ask you to churn your portfolio frequently. This means more peace of mind for you, and a more stable portfolio that is based totally on your needs.
Improvement in quality of service due to fee-based advisory services
Now that MF agents and the so called “advisors” would not get any commission from fund houses for the sale of their units, most such people would start offering fee based services. This means that for advising you about what to buy, what to keep and what to sell, they would charge a fee – it can be a fixed monthly / yearly fee, or a fee based on the quantum of your investment.
In any case, they would get paid directly by you. This means much better service for you. Why? Because now, you would have quite a bit of control. If you think that the advice you are getting is not good enough, you can go to someone else! And these agents and “advisors” would know this. And therefore, they would act in your interest!
Lesser New Fund Offers (NFOs)
Fund houses routinely launched NFOs which were very similar to existing schemes. And MF agents recommended them, as they got handsome commissions from the entry loads. This would stop, as the incentive due to “entry load” goes away. Instead, an NFO would be launched only when there is a genuine need for the new scheme.
Change in the attitude of investors
We saw the many advantages of the abolishment of the entry load. However, to benefit fully from such moves, it is important for you to understand that a genuine advisor plays an important role in the performance of your portfolio. And that such a useful service can not be free. Till now, we have been used to getting advice “free”. But remember, it wasn’t really free because the advisors were paid from your entry load – even when he recommended something that was not good for you! Now, you would get to invest the full amount, but you need to pay a fee to the advisor. And I bet that a good advisor would generate lot more returns for you than the fee he charges. Not to forget that he would now have your best interest in mind when he suggests an MF scheme for investment.
So, please get used to paying for the investment advisory service that you get – just like you pay for the service of a doctor or a lawyer!
Beware of the Unit Linked Insurance Plan (ULIP)
What does a ULIP have to do with abolishment of entry load on MFs? Now that MF agents and investment advisors don’t have to gain anything directly form selling you MFs, some might start pushing ULIPs, where they get huge commissions by selling them. And some might try to sell you ULIPs even when you don’t need them!
So, be careful and choose a right advisor – someone who understands your needs, and recommends only the investment product that is best for you.
Source: www.raagvamdatt.com
July 23rd, 2009 at 4:28 pm
Thanks for posting about this, I would love to read more about this topic.
August 2nd, 2010 at 12:59 am
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