Doing away with fees

SEBI has abolished the 6 per cent initial issue expenses charged by close-ended funds. This charge was amortised by close-end funds over their duration, and charged to investors in case of an early redemption. This is a second move aimed at reducing an investor’s direct fund expenses. Last month, the market regulator issued a guideline stating that no entry loads (usually 2.25 per cent) should be charged for direct investors in a mutual fund.

Reducing the burden Fund investors will not have to carry the load of issue expenses. Investors don't have to pay for the initial issue expense for close-ended funds any more The fund's issue expenses, capped at 6 per cent, will now be borne by the AMC Any entry, however, will continue as per a fund's policy Close-ended funds will not charge amortisation expenses for an earlier exit This is likely to reduce the spate of close-ended fund launches

While these two moves will make mutual funds even more attractive than ULIPs (which are often sold as an investment option rather than for insurance), there could be a hitch for the industry. Mutual funds could find it difficult to sell schemes on their own as they will have to draw investors without the help of selling intermediaries.

The aim is to streamline the distribution industry and also curb the large number of new funds offers. “Investors will learn to distinguish between a good advisor who offers sound wealth management and planning advice against an agent making an empty sale and pocketing the commission. The distribution industry will get regulated,” says D. Arulmany, Senior VP and Business Head, DBS Cholamandalam.

The move brings both close- and open-ended funds at par with each other. Going ahead, funds houses are increasingly expected to launch more open-ended funds as their AMCs may not want to bear the burden of new issue expenses. But newer products could see light of the day. “Funds could come in newer avatars like on-call funds, or weekly opening funds, etc., where AMCs would try to manage within the expense constraints,” says Arulmany.

 — Nitya Varadarajan