WORRY SIGNS

Calcutta, Jan. 4: Investors planning to park money in equity mutual funds will now have to pay a higher entry load.

This may seem a little surprising after the stock market mayhem in 2008 when the market tanked over 57 per cent. But blame it all on a couple of radical changes that are taking place in the mutual fund industry.

FIL Fund Management Private Ltd, the asset manager of Fidelity Mutual Fund, has made the first move. With effect from January 1, the fund house has raised the entry load -— a fee that investors have to pay while buying units of a scheme from a distributor other than the fund house itself — for all its equity schemes, including ELSS.

The higher entry load will, however, be applicable to the fresh purchases of units on or after January 1. The increase in the entry load has been rather steep from 2.25 per cent to 3 per cent.

“We have explored the impact of this increase on investors before making the change. It is our experience that stiffer loads usually mean lower churn, which helps given that investments in equities are for the longer term. According to Sebi regulations, investors have the option of investing directly without paying any entry load,” said a Fidelity spokesperson.

The spokesperson claimed that Fidelity’s equity schemes had a lower expense ratio compared with similar schemes of other fund houses that charge lower entry loads. Hence it would be comparable to invest in a Fidelity fund vis-à-vis in equity schemes of another fund house.

Distributor demand

The change may have been prompted by the demand for a higher commission from distributors.

“In a country as vast as ours, distributors play a critical role in providing the last mile access to investors and developing a client base. It should be well worth the effort for our distributors to sell Fidelity funds,” the Fidelity spokesperson said.

“Sales of close-ended schemes have dropped sharply after Sebi made it mandatory for fund houses to list on the bourses debt and equity close-ended schemes launched after December 4, 2008,” said Dhirendra Kumar, chief executive of Value Research, a Delhi-based company that tracks the mutual fund industry.

The Sebi requirement was designed to provide an early exit route to investors in those schemes.

“In fact, close-ended schemes may not sell any more in the near future after this new regulation from Sebi. So, distributors will have to depend primarily on the sales of equity mutual funds to sustain their business. Distributors have been demanding a higher commission. This has probably prompted Fidelity to increase the entry load for all its equity schemes,” Kumar said.

With the RBI slashing benchmark rates by one percentage point on Friday, banks are expected to trim their deposit. So, the timing of Fidelity’s increase in the entry load may just be right.

“Fidelity’s move could mark the start of a new trend in the domestic mutual fund industry,” Kumar said.

However, if investors buy units of a scheme directly from a fund house, they do not have to pay any entry load.

“But direct sales from a fund house’s own offices account for less than one per cent of total sales. The remaining 99 per cent sales come from distributors,” said Jaideep Bhattacharyya, head (marketing), UTI Mutual Fund.

“We’ll have to look after the interests of both our investors and distributors simultaneously,” he said. UTI Mutual Fund has no plans to increase the load immediately.