Entry load waiver: Investors get to bargain-hunt

Business Line Research Bureau Investors can look forward to lower costs on their mutual fund purchases and greater bargaining power with their advisors, after SEBI’s Thursday move to do away with entry loads charged by fund houses for their open-end schemes.
MFs currently levy a uniform 2.5 per cent entry load (on the prevailing NAV) on all equity funds sold to retail investors.
This entry load is usually passed on by the fund house, almost in its entirety, to the distributor who marketed the fund, be it an individual financial planner, distribution house, online portal or brokerage house. The entry load effectively reduces the initial investment a person makes in a fund.
For every Rs 100 invested, only Rs.97.5 would actually be deployed, with the rest pocketed by the distributor.

More choice

With no entry loads, it will now be up to the distributor to levy a separate (and transparent) commission for the services he renders to his clients.
Distributors will be free to compete with each other, offering lower commissions to lure investors into their fold.
An investor will have greater choice — either hunt for a bargain if he doesn’t need advice, or pay a higher commission if he values the quality of advice given.
Currently, neither of the parties had this flexibility, as entry loads of 2.5 per cent are “bundled” into every equity fund (debt funds usually charge no entry loads) bought through an agent.

Competition may trim costs

Having said this, will the entry load waiver actually reduce costs for investors, given that a commission still has to be paid? Much will depend on how intermediaries actually react to this move. If all of them decide to retain commissions at 2.5 per cent for every equity fund purchase, investors may not have much of a choice in the matter.
However, two factors may actually help in bringing down costs for investors over the medium-term. One, the mutual fund distribution industry is fragmented and made up of many participants — ranging from banks and financial services firms (such as Bajaj Capital and Birla Sun Life Distribution), to the many individual financial advisors. Online stock trading portals also offer facilities for transacting in mutual fund units. Given this backdrop, there is healthy competition between participants to ramp up volumes; that makes it quite likely that one or more of the participants will eventually offer lower fees, as a key differentiator.
The deep cuts in brokerage charged on stock market transactions over the past three years, is evidence enough of this. Two, as SEBI has already waived entry loads for direct walk-ins and purchases by investors in mutual fund schemes last year, investors do have the choice of completely circumventing the distributor to purchase MF units. That too may keep up pressure on distributor commissions, trimming costs for investors.

Source: http://www.thehindubusinessline.com/2009/06/19/stories/2009061951891000.htm