Fighting The Fee Fever

Over the last couple of years there has been a sea change in the cost structure relating to mutual fund investments. The Securities and Exchange Board of India (SEBI) began the process by abolishing the initial issue expenses. This was followed by removing the entry load for direct application w.e.f. January 1, 2009. The direct window was expected to bring about a major shift in the investing pattern of mutual fund investors. Of course, it also raised fears in the minds of mutual fund distributors about the likely impact on the prospects of their business.

However, contrary to the expectations, most MF investors continued investing through distributors. That’s because in spite of MFs being a simple investment vehicle for invest-ing in equity as well as debt markets, investing in them is not so simple. The vagaries of the markets as well as a wide variety of funds require investors with different investment objectives, risk profiles, time horizons and tax implications to pick the right funds and in the right proportions to get the desired results.

It can be quite daunting for investors to make the right choices both in terms of products as well as the strategy. Besides, if someone chooses to invest directly, there are hosts of issues to be tackled such as tracking the performance of funds in the portfolio, keeping up-to-date on the regulatory changes from time to time, following the ever-changing markets and investment environment as well as operating hassles.[PAGE BREAK]

Not that every mutual fund distributor has the capability to guide investors through the treacherous investment process. There are many who do misselling and as a result investors have to suffer. That’s why, it is important for investors to be alert and ask the right questions at the time of making investment. Remember, you don’t have to be an expert to ask the relevant questions. Of course, asking the relevant questions is different from doing it yourself.

In the meantime, while investors were still grappling with the dilemma of whether to invest directly or take the help of an advisor, SEBI came out with a further amendment in the regulations. Starting from August 1, 2009, the entry load has been abolished on all mutual fund investments. Simply put, even if an investor invests through an advisor, he will not be required to pay an entry load. In the new system, the upfront commission or the advisory fee will now have to be paid by investors directly to their advisors. Though there will not be any entry load, MFs are allowed to charge an exit load. Of the exit load charged to the investors, a maximum of 1 per cent of the redemption proceeds can be utilised by the fund house to cover marketing and selling expenses.

As expected, there has been a hue and cry about the likely impact of this amendment on distributors and on the MF industry. The question being asked is whether SEBI could have opted for a more feasible option that had the potential to improve the transparency levels as well as control the cost of investing in MFs. Without getting into the merits and demerits of the SEBI’s initiatives to empower investors through transparency in the system of commission and load structure as a lot has been written and said about it, let us focus on a core issue i.e. are investors and advisors equipped to decide on an ‘appropriate fee’ for various services related to mutual fund investments.[PAGE BREAK]

Though the new system allows investors to negotiate and control the fee that they pay for investment advice, deciding on an ‘appropriate fee’ can be a daunting task for them. Considering that many investors in our country lack knowledge about mutual funds and the markets, determining the fee based on factors such as quality and delivery of advice, service standards and continued support in managing their hard-earned money is going to be quite challenging. In fact, many advisors too will find it difficult to quote an ‘appropriate fee’.

While the level of entry load in the erstwhile regime can be a benchmark for the fee structure, factors such as the total value of the portfolio, frequency of investment as well as broad allocation between equity and the debt instruments will be crucial in making the final decision. On their part, investors will do well to focus on selecting a professional advisor rather than saving a little on the fee by utilising the services of those so-called advisors who do not have the wherewithal to guide them through the duration of their investment time horizon.