Reversal of entry load is only way to revive mutual- fund industry.....?

If you ask me above question my answer would be certainly not. Bring back entry load is not good for investors at all also. In last few months we have came to know about the news of reversal of entry load in mutual fund through various media. Everyone is debating about this issue including market regulator, fund houses and distributor communities. In 2009, SEBI, abolished the entry load-the initial fee charged by mutual funds from investors to pay distributors for the investor’s interest. But recently, financial advisors requested to the regulator to reintroduce the entry load in mutual fund industry to widen the reach of mutual funds. There is no doubt that ending the entry load has impacted the mutual fund industry to the some extent but the real question is the same is reversal of the entry load for investor’s interest. The interest of the investor lies in being suggested a good fund, starting an SIP in it, and then sticking to it. The distributor should raise level of the quality of the advice for the suggesting good fund in unbiased manner. They should not blame to abolishing entry load for struggling mutual fund industry. In my personal experience I have observed that investor is ready to pay the fee for honest and quality advice to the distributor in the most of the cases. 


For example, There are two way of purchasing the medicine , the one is to direct purchase the medicine from the medical store without consultation of doctor and the other one is  to purchase medicine after consultation of doctor. For consultation we pay fee to the doctor. The same logic work in this industry also. Investors are ready to pay for the quality and unbiased advice.Hoping to restore the industry's fortunes by reversing this decision of banning entry load would be a wrong move for investors.

The end of entry loads was widely and correctly perceived as an investor-friendly act, which addressed the problems of mis-selling and churning to the large extent. Now the competition is for good advice and quality product.  The reasons for the reduced retail inflow were high deposit rates, a volatile, range-bound equity market, and uncertainty over ELSS funds also, not the ban of entry load only.


There are many ways to bring new investors into the mutual fund investment. Here I would like to maintain few of them.

Investor awareness:

Due to the lack of knowledge investor invest into the wrong mutual fund schemes. I was shocked when one of my educated friend related with investment sector once told me that mutual fund only invest in equity market and according to him it is very risky product. For those who want safety of capital this is not right product. Such type of misconception is also responsible for the current status of mutual fund industry. There is really no reason why the fortunes of the mutual fund industry must be pegged directly to the ups and downs of the Sensex and Nifty. While a growing stock market can help inflows into equity funds, there are quite a few other ways to bring investor’s interest in the category.

Promote other category fund also other than equity fund :

Mutual funds just don't manage equity products. They also manage liquid funds, short-term debt funds, fixed-maturity plans, gold exchange-traded funds and balanced funds. These products are eminently suitable for retail investors. (We will discuss these products in detail in the next coming articles) Companies, banks and high net-worth investors reap the benefit of these products. Retail investors, due to the lack of awareness stay away from these products. An awareness campaign on categories such as gold exchange-traded funds or liquid funds can help draw investors into mutual funds. In the current economic condition short-term debt funds are in fact the ideal entry point for a first-time investor into mutual funds.

Investment process should be mad easy :

Now it is mandatory to compile the KYC is compulsory for each investment regardless amount of the investment. This process need should be made more easier. For investing in mutual funds investor need to deal with multiple fund houses, registrars, application forms and account statements. Online transaction portals such as Fundsindia.com, eticawealth.com and Fundsupermart.com have simplified matters.

Rural presence should be increased :

According to the industry data, the share of  rural part of the country in mutual fund is too less. The fund house largely depend upon the urban and metro cities and missing the large chunk of investment amount of rural part. According to the one survey, only 3-4 per cent of households have an internet connection. The industry needs to pay greater attention to investors who don't have internet access too. For this fund house can use traditional avenues such as public sector banks, post offices. Fund house only 20-30% fund get from rural part. So there are tremendous opportunities to reap the benefit through the awareness programme in all the part of the country.

In my opinion only bring back entry load is not the solution for languishing mutual fund industry. Industry can bring new investor from the awareness program, better advice and proper presence in rural india.

Regards,

Arvind Trivedi

Certified Financial planner