SEBI zero entry load guideline for Indian Mutual Funds

The Securities & Exchange Board of India (SEBI) has given you a wonderful New Year's gift - an opportunity to invest in equity oriented mutual funds without paying any entry load! To avoid paying the entry load you now have to invest directly with the Mutual Fund i.e. you have to submit the form directly to the Mutual Fund without the assistance of any agent/distributor.

Now, that's not very difficult! This new initiative from SEBI is practical and stands to benefit tens of thousands of investors!

The BIG loser - the mutual fund distributor.

 The mutual fund distributor who meticulously filled in your application forms, submitted them, and then handed over the receipts to you, has been hit the hardest by this development.

Consider this - Let's say you invest about Rs 1,000,000 every year in equity oriented mutual funds. The load that you pay on this is Rs 22,500. This load is generally the commission that is paid to your distributor (some distributors get a lot more). So, for simply filling in application forms, submitting them, and then handing over to you the receipts, you pay him Rs 22,500! That's very generous for such a service, isn't it! Now, with this new guideline in place, you can actually save this Rs 22,500!

No wonder distributors are not in favour of this SEBI proposal! On the face of it, SEBI's guideline benefits the investor and hits the mutual fund distributor. But, in our view, a lot of investors may not benefit, or may even lose as a result of this development. It's being penny-wise and pound-foolish.

Let's step back and understand the cost you can incur when investing in mutual funds. So really the cost saved will be on account of any investment you make in the equity oriented funds; in case of the debt oriented funds there were no loads in any case. So no benefit there. But since most investors have a blend of funds, likely to be skewed in favour of equity oriented funds, it would be correct to say that the savings would be substantial in any case.

There are hundreds of equity funds in India. And more are being launched every week. And then there are the hundreds of debt funds, with many more being added every month. How do you then decide which fund is the best for you?! How do you build the mutual fund 'portfolio' that is best suited for your needs?!

SEBI's decision is in your interest. But you must gear yourself to benefit from it.