- Wealth PMS
SEBI has banned entry loads in mutual funds. From August 1, any mutual fund purchase will be invested in full in the fund. Distributors, if they like, must be paid separately.
This is a welcome move, as entry loads don’t make sense for everyone. There are people that need advice. There are those that don’t. For the latter, ponying up money is a waste – they already know what to buy.
Yet, we now have a problem. Most distributors aren’t going to want to travel the distance to get you forms, take cheques and get you your mutual fund statements, unless you pay them separately. Since they are used to the 2.25% commissions, they will ask you for that much, even if the work involved with a 1 lakh purchase is the same as a Rs. 5,000 one.
How do you buy mutual funds then? If you’re buying from a fund for the first time:
I will create a spreadsheet listing fund houses, their online transaction capability and web sites.
CAMS and Karvy sites are useful to get transaction details etc. Each mutual fund house will have one of the two as the registrar, and you can find out which one your fund uses by calling your fund or checking the respective sites.
Remember to write “DIRECT” as the broker code in the application form. You may not pay upfront loads but you will pay what is called a “trail” commissions – payable yearly to the distributors. If you don’t write DIRECT, someone could write in their ARN code, taking some money off the fund.
Some pain is now being transferred into the fund. Earlier trailing commissions would be of the order of 0.50% a year. Now, to offset the lack of entry load, funds are looking to up trail commissions to 1% or more. This will eventually show up in the “management fee”. Luckily this is restricted to an overall 2.5%, but it means that the hitherto lower cost funds which were charging 1% fees might up the costs. MFs are also upping exit loads to pay trail commissions (beware of the agent that asks you to exit early!).
What you want to do is, when you’re investing, totally avoid insurance agents or mutual fund distributors trying to sell you insurance. They will sell you ULIPs which have big fat commissions. There’s an IRDA circular but that’s not a big deal – just a farce compared to what SEBI has done.
Mutual funds may be tradeable online if an AMFI initiative to set up online trading (buy/sell any MF) happens, by March 2010. Till then, be prepared to do more work yourself.
Couple interesting links: