Ban on Entry load cuts churn in MF schemes

The ban on entry load (the fees charged from investors for entering a scheme) has brought some sanity in mutual fund (MF) distribution. The move has ensured a drastic reduction in portfolio churning from the levels seen in 2006-07.

While there is no data to prove it, sales heads at asset management companies say the incidence of investors shifting schemes frequently has gone down substantially.

Distributors and independent financial advisors (IFAs) admitted that this was rampant some time ago but not now, as it had become less rewarding due to the ban on entry load.

Portfolio churning had become a serious issue, with a section of distributors advising investors to churn funds frequently just to earn more commission. During the entry-load regime, fund houses used to give distributors heavy incentives. This meant distributors recommending even schemes not suited to an investor’s risk profile.

“A section of the distribution community was obviously doing it. But in the last four-five months, we have not noticed frequent shifting of schemes. The number of transactions and the overall business have been quite muted, but from the investment pattern that we have observed, retail investors are now more focused on performance than switching funds. Churning has come down significantly,” said the national sales head of a mutual fund.

One of the regulator’s motive in scrapping the entry load was to stop these activities. However, mis-selling continues, with distributors and smaller IFAs giving preference to insurance than mutual funds as the former earns them more commission. However, instances of distributors asking investors to switch funds within a span of days has come down.

“The revenue model has changed. It is not viable for distributors to do that now because the incentive has gone. The average holding period for our investors in equity funds who come through the SIP (systematic investment plan) route is 12 months, which we expect to go up as investors mature. There is much more awareness among retail investors now,” said Puneet Kapoor, head of products at Kotak Mahindra Bank.

The churn has also come down because the number of IFAs selling MFs has gone down significantly. After the ban on entry load kicked in from August 1, industry estimates suggest that close to 70 per cent of IFAs shunned MF distribution. For agents in tier-II towns, it did not make sense to sell MFs because they could not survive on margins of 50-60 basis points to 1 per cent.

“Logically speaking, churning should have come down, but there are no figures to support it. The main reason for churning portfolios frequently has been done away with. The flow of NFOs (new fund offers), one of the major reason for the churn, has died down and there is not much enthusiasm now, as shown by the collection of recent offerings. Retail investors have become more mature and the level of awareness has risen sharply. Investors now question the logic of investing in a particular scheme”, said Vineet Arora, head of product & distribution at ICICI Securities.

Investors pulled out Rs 1,109 crore from equity funds in November. Since August, the category has seen net outflows of Rs 5,130 crore. But, analysts say that most of it is profit-booking and not necessarily portfolio churning. The latter would have meant some inflows coming back, which has not happened as there have been net outflows for the past few months.

Source: http://www.business-standard.com/india/news/banentry-load-cuts-churn-in-mf-schemes/382200/