Prax recently forwarded me this SEBI circular about ban on entry loads for all Mutual Funds.
Now I agree that it is beneficial for the consumers. But was it a much needed reform? This move will do more harm than good. Here is why:
In spite of the fact that we have very high taxation rates and our savings rate is also amongst the highest in the world, most Indians do not understand financial markets or tax planning. Mutual funds have been valuable learning ground and one of the best stepping stone for these individuals and has helped them to understand how the markets operates and what are returns.
It teaches people how the growth in economy translates into increase in valuations of stock market and how they can tap into it and make money.
The mutual funds disclose their portfolio and hence gives chance to a common man what good companies are and how to pick and choose a company.
the sector funds help us identify the areas where growth is likely to happen
and the debt funds teach us what inflation is and how the interest rates are expected to behave in future.
In gist, in the past 5 years, through mutual funds Indians have been able to channelize their money into stock market and not only benefited from it, but also helped several industries to raise funds, expand their operations and fuel the growth of the nation.
But the real warriors which helped the mutual funds bring in such a revolution were the Agents. They painstakingly sat with each individual, explained them the risks, benefits, the strategies etc and helped the mutual fund market grow to proportions it is today. If the mutual fund industry was not there, then a few thousand Indians and FII would have cornered the entire market kept the entire benefit of the growth in indian economy.
Few years ago, when I had a good entrepreneur idea, a wise man had said:
“Its a good idea and you can help thousand of people with it. But the only problem is that you cannot make money out of it. It is almost impossible to hope that Indians will pay the right price for any service/advise/assistance. They will pay thousands for a piece of equipment, but they want all their software, and advise for free.”
Thats exactly what has happened with the mutual funds. If you want to reform them, reduce the Asset Management Charges (which are the highest in the world), do not starve the poor agents. With one stroke of pen, SEBI killed an entire booming industry
Another reason why I say this step was counterproductive because already there were several funds which charged zero entry/exit load.
1) Exchange Traded Funds
2) Index Funds
3) Liquid funds
4) NFO (the entry load is hidden)
Yet they were not popular and most people are not aware of their existence. Had people be as cautious as the SEBI claims towards the entry load, then we would have seen more and more money flowing towards these funds and this would have put a competitive pressure on the traditional mutual funds to cut costs.
A lot of people still need hand holding, and by killing the financial advisory we have robbed them of their road to riches.
23 replies on “Mutual funds: Zero Entry load!!!”
🙂 The poor agents still earn their livings because of entry load. ITs waived off only if the inteligent people walk to AMC and submit it.
BTW index, ETF are loadless funds because nobody does research, advertise on those. Liquid funds are pure debt funds with no research etc… its obvious.
mohan…
Thanks for the inspiration to write this post… it opens up my mind to some good debating and exchange of ideas.
// 🙂 The poor agents still earn their livings because of entry load. ITs waived off only if the inteligent people walk to AMC and submit it.//
what i suspect is even worse…. these intelligent people with sit with a agent for hours, understand the entire concept and then walk into the AMC and buy their funds (bypassing their commission)
and don’t tell me this will not happen.
//BTW index, ETF are loadless funds because nobody does research, advertise on those. Liquid funds are pure debt funds with no research etc… its obvious.//
whats good is that research when 50% of the mf this year and 70% of the mutual funds performed less than the Index.
http://enagar.com/2007/12/11/over-50-mfs-are-underperformers/
while no matter what index fund will always go up and down with the index it is tracking…
about ETF, few good ones are trading at 10% below NAV… so effectively it has a negative entry load. (and its performance is always at par with the sensex)
about advertisements…. if you look at the charges… you pay 1% of your NAV every year on advertisements… tell me yourself.. what would you prefer… blow off 1% of your assets to build someone else’s brand image or have it in cash?
What a great post! I had no idea about the negative effects, looking at the smaller picture with my limited knowledge.
Another great example of how the State should not interfere with the markets. Every well-intentioned act of the Government ends up doing bad in the long run.
//the smaller picture with my limited knowledge.//
thats why we blog… it opens up the mind and allows me to absorb new ideas.
the problem is that government always under estimates the power of competition.
if that was not there, u and I would be still driving an Ambassador (which is a 40 year old design) and would be paying 3 times the cost for it.
BTW i am doing a second post on futures and derivatives so that i can explain the idea in detail.
well i think u got it wrong this time ankur
i agree abt high amc charges sans regulation which has made amcs rich
i ws an agent at age 17
zero entry/exit load. – well still the sums invested add to targets and agents get added commns
first 80=% agents do not act in good faith or to benefit of investors bt for the sole commission consideration, they push most investors to ipo /nfos as they get max commission – including some banks etc
there are a creed of intelligent investors investing directly
those that shouldn’t be burdened with this load – and i think this rule will make more intelligent investors
and on the flip side intelligent agents who truly help their investors will survive and grow while some rogues will loose some business
lastly the agents are goin nowhere as most people don’t even know how to fill them forms, let alone invest
yes there will be people who take free info but the agents r not dumb creatures now , are they?
lastly lets see how this is implemented
ps wont this be implemented hush hush by amcs who tend to use agents for getting subs to their nfos?? and are very adverse to loosing this tool ??
//i ws an agent at age 17//
if i am not wrong: to be an agent today, you need to pass a certification exam from NSE/BSE. so in other words only if you know the intricacies then you can advise people. so 17 or 77 should not matter.
//most people don’t even know how to fill them forms, let alone invest//
exactly 🙂 so you understand how valuable their services r….. so why kick a poor guy in his belly?
//first 80=% agents do not act in good faith or to benefit of investors bt for the sole commission consideration, //
they did a nice job in educating the common man about how stock market works…. they made money in the process, but whats the harm… i have never seen a guy (other than myself) complaining that he did not make sufficient money in the stock market
//there are a creed of intelligent investors investing directly//
there already were instruments for them to do that without paying the commission.(the list is there in the post)
//i think this rule will make more intelligent investors//
the intelligent investors have already moved to individual stocks, index funds and IPOs…. because these deliver superior returns… mf is still for those who r testing the waters.
//and on the flip side intelligent agents who truly help their investors will survive and grow while some rogues will loose some business//
thats called repeat business… u make a dollar for me, i will not only invest 10 more dollars, but refer to 5 more friends.
u loose money for me… and i will bad mouth you everywhere.
//yes there will be people who take free info but the agents r not dumb creatures now , are they?//
what is preventing me from taking free info and then making a purchase directly????? can anybody stop me?
oh come on stop kidding
what is preventing me from taking free info and then making a purchase directly????? can anybody stop me? INTEGRITY AND COMMON SENSE
no agent is an idiot and will not give his inputs for free
repeat business yes and no it is also called trust
intelligent investors// still need to invest in mf for tax pps
they did a nice job in educating the common man // give me a break
if i am not wrong /// iwas for mf fd etc now AMFI IS NEEDED
which is an easy exam that u too can pass
http://www.brainpointinv.com/
this is a good agent
his services are paid for by investors
also
http://www.business-standard.com/common/storypage_supp.php?autono=309818&subLeft=0&chkFlg=Features
http://www.suchetadalal.com/articles/display/569/2686.article
well known and alarming!
while half the world reads only the headlines and cover story.
ToI is i guess the only paper in the world that regularly have full cover page advertizements….
what can i say
//Investors Need an Advisor, Not a Salesman//
i totally agree to that… but in absense of selfless advisors, salesmen is the next best thing
hey where did my reply to ur retort go?
i also take the raddi paper sometimes on sats mondys and weds
//hey where did my reply to ur retort go?//
wordpress detected some hostility .. hence maybe they put it under moderation….
don’t worry it happens to me a lot of times.
//INTEGRITY AND COMMON SENSE//
i will tell u my case… i went to the biggest mall to check and compare the different brands and models of refrigerator/tv, made up my mind… then went around the town to find the store that offered the lowest cost.
I agree morality and ethics is not the highest in my list…. but i am not alone doing that.
//repeat business yes and no it is also called trust//
exactly… stock market is very dicey… and having someone who can give me trust and reassurance is priceless.
//still need to invest in mf for tax pps//
i totally agree…. and i also say that this SEBI’s move is a appreciated by a lot… but what i do not like is that with a stroke of pen SEBI killed an entire booming industry….
they did a nice job in educating the common man // give me a break
// now AMFI IS NEEDED, which is an easy exam that u too can pass//
dude your IQ should be 120+ (mine should be also high because I am a mensa member) and our aptitude lies in stock market.. so obviously it has to be easy for u and me. anyways point is AMFI ensures that only the people who know MF, advise about it.
//i also take the raddi paper sometimes on sats mondys and weds//
is it because it is re 1/- on those days, or because ur fav hottie comes in the bombay times on that days
sorry none of the above it costs 4/5 bucks if im not mistaken
hotties – u must have known by now which is the biggest business on the net
mostly on satrdys bcause of all the adds and exibitions and the property edition so as to keep a tab on all that
b times is boring –
SEBI killed an entire booming industry….
cut out the crap the industry is goin nowhere
say under 10% of investg folks will switch to direct investing
refrigerator/tv, hey i do it too but sometimes cause i also see service aspect
vijay sales says their price is the best so does kohinoor and sumaria
but someone else eventually undercuts them – so tell me dont they not cheat when they say they offer the best price
and look at their bloody margins they are like the amcs ….
btw do u do that often?? i guess u dont
cause investing is not done once a yr its done from time to time
hope i can rest my case here
@prax…
//refrigerator/tv, hey i do it too//
exactly… now u got my point… we might take advise from one place and make sales at another…..
however, as you are hinting.. if the advisers start charging advisory fee (like lawyers do) and stop relying on commissions than .. probably this could be called a revolutionary ruling that spurred this change.
urnt gettin my point- i meant
it is ok to do it with a frigo cause u buy it once every budget at most.
u may not be an mf person but the whole country does
so day in and day out they have better things to do than go to agents and take their tips and go invest independently
plus agents are smart they will not always give around free advise
ok…. lets see how the future unfolds.
yes i am not a mf guy… and thats because my personal portfolio always delivers superior returns. (i am consistently getting close to 100% p.a. for the past 3 years and when I am lucky, like this month, i got 50% returns in a month)
plus mf units are not accepted by exchange to create limit for fno trading.
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Here is a detailed article on this:
http://www.pankajbatra.com/2008/09/05/mutual-fund-investment-with-zero-entry-load/
This article is very affective.