Did You Know | MF transaction charge is not compulsory

Sebi has given the option to distributors to either charge or opt out of charging it to their investors

The transaction charge on mutual funds (MFs) that the capital market regulator, Securities and Exchange Board of India (Sebi), has allowed the agents to impose on their investors is not compulsory. Sebi has given the option to distributors to either charge or opt out of charging it to their investors.

Compensating agent’s efforts

After U.K. Sinha took over as Sebi chairman in February, he constituted a committee to suggest measures to “revive the Indian MF industry”. Sebi accepted this committee’s recommendations and introduced a transaction charge of Rs100 that distributors can charge to investors for every subscription of Rs10,000 and above. If you invest in an MF for the first time, you will be charged Rs150 for every subscription of Rs10,000 and above and then Rs100 for subsequent investments.

However, since Sebi has given the option to agents to charge or not to charge, there’s a good chance that your agent may not collect this fee. Market sources say that many agents who work in metros and big cities such as Mumbai, Delhi and Ahmedabad will not collect this fee. For starters, many such large and established agents feel that this fee is too small. Also, after the entry loads were abolished, many large distributors changed the way they do business and started accepting charges directly from investors, as per Sebi’s August 2009 advice. Internet transaction portals such as www.fundsindia.com and www.fundsupermart.co.in have categorically stated that they will not impose transaction charge. So you need to ask your agent whether or not he will levy transaction charges at the time of investment.

Braving dual policies

Sebi has clarified that agents will have to follow a uniform practice when dealing with their clients. In simple words, if your agent chooses to levy transaction charge, he will have to collect the same from all his clients. He cannot charge one client, and choose to exempt another.

However, if your agent is a sub-broker and works for more than one broker (main agent at the umbrella level), there could be a problem. If one of his main agents opts for the transaction charge and the other one opts out, he can charge investors who are registered under the first agent and exempt those registered under the second. This is because the decision to charge or not charge—in a broker and sub-broker business model—lies in the hands of the main agent as the main agent’s ARN (Association of Mutual Funds in India, or Amfi, registration number) code goes on the MF investment form. Amfi tells us that in this case, the agent (sub-broker) will ultimately need to decide who he wants to align with; the agent (main broker) who charges or doesn’t charge the transaction charge.

Source: http://www.livemint.com/2011/08/25205715/Did-You-Know--MF-transaction.html?h=B