A year of reforms for the MF industry

Suresh Parthasarathy

In many respects, 2009 will be remembered as a watershed year for Indian mutual funds.

During the year, the SEBI took up drastic reforms in the area of entry loads, distributor remuneration and transactions in mutual fund units. However, the transition proved to be difficult for the industry; as the year draws to a close, it is still grappling with the changes. Here's a look at the changes and their impact.

With effect from August 1, 2009, SEBI abolished the entry load mutual funds levy on their customers when purchasing units on the principle that the system of building a flat commission into the purchase price of funds was not transparent. SEBI suggested that the financial advisor charge the customer directly for the service rendered and disclose the commission they are likely to receive from the fund house concerned.

The move was opposed by distributors. After the rule took effect, inflows into equity funds dropped by half in the first few weeks and have remained tepid since. To improve inflows, fund houses have taken to paying 0.25-0.5 per cent on investment as upfront commission from their pocket to distributors.

The abolishment of entry load for mutual fund investments is still being debated in some developed markets and few have a road map to implement the abolishment over the next few years.

Uniform exit load

After the abolition of entry load, fund houses started charging higher exit loads on their funds. To curb this, SEBI asked funds to comply with the guideline of charging uniform exit load for all investors.

Schemes were asked to maintain all collection by way of loads, including the contingent deferred sales charge, in a separate account.

Of the exit load, a maximum of one per cent of the redemption proceeds was required to be maintained in a separate account. This was to be used by AMCs to pay commission to agents, with the rest to be credited to the scheme.

The SEBI also allowed the exchanges to trade in MF units. The NSE and the BSE soon opened platforms that allowed investors to buy and sell mutual fund units. Investors owning a stock trading and demat account with a broker can now buy mutual fund units as they buy stocks.

The move is expected to expand the reach of mutual funds through the 1.5 lakh share broking terminals in 1,500 cities.

A big benefit of the new system is that mutual fund investors can hold multiple mutual funds in dematerialised form. An investor using this facility need not hold multiple statements of accounts for his investments with different fund houses. He can track all his MF investments with a single demat account statement.

No objection certificate

SEBI also decided to make it easy for investors to switch mutual fund distributors by recently ruling that funds cannot seek a no-objection certificate from investors shifting intermediaries.

Assets of the MF industry grew by 75 per cent from Rs 4.6 lakh crore to Rs 8.07 lakh crore for 2009. The equity assets of the industry shot up from Rs 1.1 lakh crore to Rs 2.05 lakh crore during the year, with the stock market gains helping this process.

However, inflows to the MF have predominantly come from debt funds and debt assets are at a historic high.