| New order in Mutual Funds | |
| Arnav Pandya / Mumbai June 28, 2009, 0:54 IST | |
Entry load abolition throws up new issues for investors.
Investors have to approach things differently now in the mutual fund arena because of the sudden and sweeping changes introduced with the announcement by the Securities and Exchange Board of India (Sebi) to abolish entry loads. One of the main areas where attention will have to be focused is on the manner of dealing with distributors and this needs some additional homework.
DIRECT PAYMENT
The main manner of operation of the entire system is that there will not be any entry load for the individual investor. This means that every scheme in the market will have to abolish the load and the investor will get the units in the scheme at the net asset value (NAV) of the scheme. So, if the NAV of a scheme is Rs 15 and the investor puts in Rs 30,000 into the scheme, then he or she will get 2,000 units for this investment.
Earlier, the entry load would have resulted in a slightly higher cost and consequently, a lower number of units for the investor for the same amount of investment.
There is a second angle because of the presence of an intermediary in the form of a distributor in most transactions. When the investor uses a distributor, currently the commission is paid by the mutual fund to the distributor, so there is no payment by the investor to the distributor.
Now, with the entry load abolished, a new system will have to be set up whereby the investor will pay the distributor directly, depending upon the value that they see in the entire transaction.
Several conditions will have to be considered in determining the actual amount of payment to the distributor.
VALUE OF SERVICE
One of the first conditions that will have to be checked in the entire transaction is the value of the service provided by the distributor to the investor. Till now, since there was no payment being made by the investor, there was not much attention paid to this. There has to be some value addition if there is a payment to be made and this will require some calculation. For example, if a distributor mainly helps in just filling and depositing the form, then an investor might value this activity at just Rs 1,000, whether there is an investment of either Rs 2 lakh or Rs 20 lakh. On the other hand, if there is high value addition in terms of advising on the right scheme, then the payment could be Rs 5,000 for each scheme advised on. Being able to put a figure on the value addition is important to come to the right decision. Most investors have never actually considered this at all and hence this is likely to be a very difficult task.
RANGE OF SERVICES
Another aspect that has to be considered is the range of services the distributor will be able to provide the investor. Some simple aspects will include the kind of help done with the paperwork but there is also an aspect of follow-up. This will include dealing with the MF in case of any problem or helping in meeting additional requirements of submission of documents and so on. Ability to do this kind of work can lead to a larger payment, so an investor can decide to pay Rs 4,000 to the distributor if he takes care of this entire aspect. The time period for this arrangement will be important. Since this is not something that will arise in every case, there has to be an element of estimation made in the entire process about its probability. The additional factor to be considered is also the value that will be put to this aspect by the investor, as it would change from investor to investor.
INVESTMENT DECISION
The real value for most people will arise with respect to the fact that the actual decision about the investment will require some element of analysis. This has to be about the advice regarding the exact investment and this will involve asset allocation details, plus moving between different types of MF schemes. Thus, a decision of how much to allocate to debt funds and how much to equity funds and gold funds, plus which particular scheme has to be chosen, will be valuable for the investor. Achievement of the investor’s goals will also need to be considered and then a specific payment made for the same. This will require the setting up of performance measurements and the payment can be linked to this. For example, an investor with a portfolio of Rs 10 lakh would be willing to pay Rs 10,000 to a distributor if the right advice is available for investing the amount and achievement of a strong and stable portfolio. The danger is that some other investor might be willing to pay just Rs 1,000 for the same work.
COMPETITION
One aspect that cannot be forgotten by the investor is the competition in the market. If there is no specialised value attributed to the service of the distributor, then in order to complete the overall process, there might be the use of the least expensive option. Competition will also redefine the amount that would be generally paid and hence this would be the benchmark for making the overall payment to the distributor. For example, if a particular distributor is providing service for advice on investments at Rs 2,000, then the investor might not pay higher than this to another distributor. This is a vital part of the process and hence this needs attention.
The author is a certified financial planner
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