When Sebi confuses you

Mutual fund investors have seldom had it so bad. The stock market is giving them enough headache already, and the market regulator is adding to that.

A few months back, the regulator, the Securities and Exchange Board of India (Sebi) came up with guidelines, whereby investors putting in more than Rs 10,000 annually in mutual funds would have to pay a fee of Rs 100. For new investors, the amount is Rs 150. For investors putting money through systematic investment plans (SIPs) exceeding Rs 10,000 in a year, the fee of Rs 100 or Rs 150 was to be deducted in two-three instalments.

Things sounded quite simple then, but the sting in the tail was the ‘opt in’ facility, where distributors were allowed to opt for this amount of Rs 100-150, or not. Then, the confusion started.

Many distributors, including big players, who were anyway making more than this amount, decided not to 'opt in'. The result: Today, we have two sets of distributors - one taking commission and the other not taking. And, a number of remuneration models are floating around.

For the investor, it is a rather confusing situation. For one, how do they know who are getting paid by fund houses and who are not. Besides, there is the question of cost. Even the ones who have decided not to opt in work on different models. Some depend on the trail commission, that is, the annual payment that mutual fund houses make. Others charge by impressing on the investor that they would give them sound financial advice. Yet others have a different model.

The investor, as a result, has many options. The proponents of free-market economy would support competition because it means investors have many choices. But there is a glitch. Mutual funds are still a push product for investors. But, in the absence of clarity on remuneration, it is difficult to take a call whether they should go with a distributor, or an institution, or do it directly at zero cost. Importantly, there are no benchmark guidelines for 'payment for service rendered' in the financial sector.

There have been cases where some educated investors have asked distributors whether they have opted in or out of the scheme. However, there is no such document with the distributor to prove it. The investor, that implies, will have to wait for the statement to know if they have been charged by the fund house as well.

In the past, fund houses have objected, though not directly, about the flip-flops of the market regulator. When entry load was banned by Sebi under C B Bhave in August 2009, there was a furore initially. The industry lost assets under management in equities consistently for almost a year.

Then, the present incumbent, U K Sinha, gave the industry some breather by introducing the Rs 100-150 guideline. And, in spite of the breather, the industry claimed it was too little. Like a chief executive officer of a leading fund house once confided: "The market regulator should realise that there is time required to gauge the impact of any new regulation. By the time we were able to draw some conclusion about the impact of the entry-load ban, it came up with a new guideline."

Anyway, most feel that the Rs 100-150 relief is not enough to deepen the market, while some others feel it will help expand the market in smaller towns. It is better if Sebi brings in uniformity. There is just no point confusing investors.