Are you still paying an entry load?

If yes, you are earning less on investments and, in dull market conditions, it can cost you dearly.

In August 2009, the Securities and Exchange Board of India (Sebi) forbade mutual funds from charging an entry load. Recently, it was reported that as many as 200,000 investors were still paying an entry load on their systematic investment plans (SIPs). For SIP investors, the notice had specified that investors would have to pay the entry load, if they didn’t shift their investments after August.

That means in these 23 months, if you were investing Rs 10,000 a month in an equity fund, you have already paid entry load of 2.25 per cent per month or Rs 5,175. Since the category average returns on large-cap equity diversified funds have been 13.67 per cent in the last two years, a loss of another 2.25 per cent would reduce returns further.
 

KEEP IN MIND

• An SIP registered before August 2009 can charge you entry load
• Investors have to take the initiative to stop paying entry loads on their old SIP investments.
• On an SIP opened in August 2009, you may have already spent more than 50 per cent of your monthly investment on entry loads

And, for SIPs of Rs 25,000 per month, would not only cost an investor an unnecessary expense of Rs 12,937.5 till date, but also the amount of money this extra investment could have generated in that time.

The 2009 notice also clearly said that investors would have to pay distributors directly through a separate cheque, based on their assessment of various factors, including the services rendered by the distributor. Industry sources said institutional players like banks are charging around 1 per cent on transactions. Other private players are charging around 50 basis points to 100 basis points from new investors – much lower than the entry load.

Which is why Sebi executive director K N Vaidyanathan had said that mutual fund investors had saved Rs 1,300 crore due to this ban.

The industry part, has made efforts to convert investors. But sheer laziness has not helped them. Certified financial planner Gaurav Mashruwala says “When these changes happened, all investors were sent forms which they had to fill and send for their entry load payments to be stopped. Unfortunately, a common problem with many investors is that they do not read letters or forms. Expecting mutual fund companies to change investor’s schemes to ones without entry loads is not possible, as one party to f the contract cannot arbitrarily change it, even if it is for the investors’ benefit.”

The solution: Investors can close their SIPs and start a new one. Otherwise, they can ask their distributors to convert their investment contract into one wherein they are not paying an entry load. However, getting back the money you have spent in the interim space from August 2009 till now will not be possible.

Financial planners said besides sending letters or emails, fund houses could have done very little. “An AMC (asset management company) cannot be expected to inform each SIP investor individually and ask them to change their investment. It is like when a bank FD rate increases, a bank does not call all its FD customers and ask them to close their old FDs and reinvest in a new one at the higher interest rate,” said an investment planner.

Recently, U K Sinha, Sebi chairman has formed a committee to look into ways to make things more conducive for the mutual fund industry. There have been talks recently that entry load might make a back-door entry, through a mandatory transaction cost. Also, a single-cheque mechanism might be introduced. The latter will allow mutual houses to control distributors. But there has been strong opposition from investor associations.

Whether Sebi comes out with further clarifications on this rule in the future remains to be seen. However, the current onus is very much on the investor and financial planners or wealth advisors to avoid paying unnecessary expenses and falling into this loop hole of sorts. And, please restart your SIP.