MF vendors may levy financial planning fee

The scrapping of entry load might prompt traditional distributors of mutual funds to consider offering fee-based financial planning – a service that was available nearly free till recently.

Entry load is an amount deducted by mutual funds from the investor’s subscription for making payment to distributors and for other marketing expenses. It usually ranges between 2 and 2.25 per cent.

Research base

Fee-based financial planning services are still at a nascent stage in the country.

According to industry experts, the removal of entry load by the Securities and Exchange Board of India may bring about a shift in distribution from plain-vanilla products to a holistic financial planning model.

“Investors might prefer seeking advice and portfolio services if backed by strong independent research, as that would enable the selection of the right scheme from the 300-400 equity schemes available in the market,” an industry expert who did not wish to be identified said.

Customised service

Most asset management companies have already set up financial advisors’ wings to tap the potential.

ING Mutual Fund, for instance, has set up ING Financial Advisors Network for offering such services.

“Distributors will now look at customised financial planning based on the client’s profile – factoring in age, income, number of dependents and risk profile,” said Mr Malhar Majumder, Partner, Black & White Financial Managers.

“Working out a client’s risk profile is a serious business and can take up a lot of time.”

Explaining the spirit of the regulator’s circular on scrapping of entry load, an industry expert said, “The essence of the circular indicates the need for differential pricing/commission to distributors based on the quality of advice offered to the client.”

The business model of financial advisory was radically different from the current business model of fund houses and might call for readjustment in the way business has been conducted, senior officials observed. However, it might soon become the order of the day, they added.

“If it (concept of financial planning) is logical then people will come to adjust in due course of time,” said a senior official who did not wish to be identified.

Lowering costs

The scrapping of entry load would ensure responsibility and accountability and would act as a key differentiator between a good and a bad financial planner.

“There will be a tough competition among advisors which will help bring down costs for the investors – the primary goal of SEBI,” the official added.

Funds increase loads to prevent investors' exit

Step taken in view of ban on entry load from August 1

In the past ten days, a number of fund houses have hiked exit loads in their equity and debt schemes.

Many industry experts see this as a measure to deter investors from exiting before the Securities and Exchange Board of India’s (Sebi’s) decision to ban entry load kicks in from August 1.

Around seven fund houses, including Reliance, ICICI Prudential, UTI, Bharti AXA, Birla SunLife, IDFC and HDFC have hiked exit loads by 0.5-2 per cent.

Reliance Mutual Fund revised the exit load from zero to 2 per cent for Reliance Regular Savings Fund, an open-ended scheme, in case of redemptions before one year.

HDFC Mutual Fund hiked the exit load in HDFC Arbitrage Fund-Whole Sale Plan. It will now charge 1 per cent in case of redemptions within a year of the date of allotment. The scheme used to charge 0.5 per cent for redemptions before six months.

Bharti Axa will now charge 2 per cent exit load for investments of less than Rs 5 crore in its Regular and Eco Plan, an equity fund. It used to charge 1 per cent for redemptions before six months. UTI hiked exit loads for 18 equity schemes last week. Birla SunLife, ICICI Prudential and IDFC have also revised loads for specific schemes.

Fund houses said it was a routine move to counter volatility. Debashish Mohanty, country head, retail sales, UTI Mutual Fund, said, “It (the hike) was decided a long time ago, but was implemented a few days back. It has nothing to do with the ban on entry load.”

Market experts said gave a couple of reasons. For one, many funds fear that investors in equity and debt schemes may want to exit during the month and re-enter next month once the entry load is abolished. A hike at this stage would dissuade them from doing so, they said.

Also, since Sebi has allowed them to charge 1 per cent as marketing and distribution expenses, they are preparing themselves for the eventuality.

Vikas Sachdeva, country head (retail sales), Bharti Axa Investment, said, “We revised the exit load because of volatility in the market. As investors were moving out, the new exit load would keep them invested. Many others did the same.”

On June 30, Sebi had issued a circular banning entry load for all schemes. On exit load charged to the investor, a maximum of 1 per cent of the redemption proceeds would be maintained in a separate account that could be used by the asset management company to pay commissions to distributors and take care of other marketing and selling expenses, Sebi said, adding that any balance would be credited to the scheme immediately.

Complete List of FUND HOUSES In India

Following is the Complete list of Mutual Fund Houses in India.

Taking mutual funds beyond metros

Increasing awareness among people about the benefits of investing in financial assets through the mutual fund route has contributed to this growth.

The popularity of mutual funds is growing across the country. Investors have shown a keen interest in them as a preferred wealth creation tool. The mutual fund industry has also registered tremendous growth in recent times. Increasing awareness among people about the benefits of investing in financial assets through the mutual fund route has contributed to this growth.

If one were to look at the share of gross domestic savings that goes into MF products, it has increased from 4.8% in 2007-8 to 7.1% in 2008-9. This is a healthy rise, but the share is still less when compared with the 50% share claimed by banking and insurance. It is low in terms of value as well as the number of account holders. Therein lies the challenge and the opportunity. At present, 80% of MF business comes from the top eight cities. Institutional investors contribute substantially to the assets under management. Obviously, to improve the share of MF products, we need to increase their popularity beyond the metros. How can we do this?

Education: It is crucial to educate people about investment planning, risk and returns, as well as the need to diversify across traditional and non-traditional asset classes.

Improved network: Investors need to have a physical point of contact while buying MF products. For instance, UTI has a trained army of more than 36,000 independent financial advisers across the country, who provide the last-mile connectivity to its investors. These advisers are professionally certified by AMFI and can provide guidance to investors.

Innovative products: Apart from creating awareness, fund houses must attract investors with their offerings. For instance, UTI started the Micro Pension initiative in 2006 in a bid to reach out to the unorganised workforce. Under this scheme, an investor can put in as little as Rs 200 a month. MFs are also promoting systematic investment plans or SIPs in a big way; these plans encourage regular investments and inculcate a disciplined approach to investing. This is also a smart way of negating the effects of investing in volatile market conditions.

Simple products: As fund houses tap newer and under-developed markets, they are constantly striving to simplify products and demystify the myths around MFs. UTI is also seeking to promote new channels through tie-ups with partners who have a pan-India presence, like the India Post. Customisation is the key.

Substantial resources are also being devoted to upgrade the skills of employees responsible for creating awareness about MFs among investors. Massive campaigns are being conducted to help more agents become professionally accredited with AMFI. Most importantly, trust, brand, distribution and innovation will be the key drivers for MF growth in the coming year.

Entry load: How SEBI’s decision benefits investors

SEBI’s decision to remove the entry load on all mutual funds from August 1 could lead to a healthy competition in the advisory business. This article explains the issues related to the current commission structure and applies behavioural economics to show how the proposed architecture could benefit the investors.

The Securities and Exchange of India’s (SEBI) decision to remove entry load on all mutual funds from August 1, 2009, is commendable. Mutual fund distributors would then have to directly charge their customers fees for investment advice. But how would such direct commission structure benefit the investors?

This article discusses the issues related to the existing commission structure. It then applies behavioural psychology to show how the proposed structure is different. It also explains why the direct commission structure is likely to improve the quality of professional advice.
Free or fee?

The mutual fund industry primarily relies on distributors to sell the investment products. This leads to two structural issues.

One, distributors recommend products based on the individual merits. But a “good” individual product may not be optimal within an investor’s existing portfolio. The reason is that each mutual fund sold as a separate product could lead to portfolio concentration risk.

A classic example is that of an investor who has 10 different diversified funds, bought one at a time.

Since all diversified funds invest within the same universe of stocks, a portfolio of such funds will lead to concentration risk. Such a portfolio is simply a case of fund diversification, not portfolio diversification.

This problem arises because all distributors are not trained as professional advisors — those that typically risk-profile a client and recommend custom-tailored portfolios.

Two, distributors do not directly charge their customers for recommending a fund. Investors, therefore, believe that distributors offer free service.

Unknown to most investors is the fact that the distributors are paid by the asset management firm for recommending a customer. And this money typically comes from the entry load that mutual funds charge the investors.

Investors often end up paying the distributor a fee for a product that they may not fit with their investment objective.

SEBI has sought to bring about transparency in the commission structure by removing the entry load. How would that help investors?

Choice architecture

Behavioural economists argue that decisions can be influenced by the way choices are presented. We believe that SEBI’s decision to remove entry load can influence the way investors view professional advice. Here is why.

Currently, the lack of transparency in the commission structure means that investors use distributors as a default choice.

From August, the explicit fee structure will force investors to make a conscious choice to go to a distributor.

But would investors’ behaviour change after they learn that distributors earn a fee even in the existing structure? The answer lies in what behavioural economists call as framing bias.

Suppose SEBI were to continue with the current commission structure.

This means an entry load will be deducted from the amount invested and a fee will be paid to the distributor. The investor will not feel the pain, as the fee is not an explicit cost. An investor can, however, avoid the entry load if she invests directly in a fund. The fee saved will be viewed as cash gained.

In the proposed structure, an investor would have to pay advisor fees explicitly if she routes the investment through the distributor.

The fee paid will, hence, be viewed as cash lost.

Research has shown that investors take great pain to avoid losses. That is, they are more likely to give up gains (save fees) than accept losses (pay fees). And that means distributors will no longer be a default choice.

Conclusion

Would investors at all pay for professional advice? We believe that SEBI’s choice architecture could “nudge” investors to value professional advice.

Not all investors are discerning enough to make direct investments. The ones that want advice would have to choose between distributors and professional advisors. This would increase competition in the advisory business and improve the quality of investment advice offered. And that would be beneficial to the investors.

SIP, effective means of wealth accumulation for retail investors

Some trends never go out of fashion. Probably because they are time tested and proven. Taking a leaf out of the age-old piggy bank concept, fund houses are now re-inventing the systematic investment plans (SIPs). The product, a great success globally so far, has proved to be a great way to accumulate wealth for retail investors with low risk appetite. The virtues of rupee cost averaging and compounding has made it a popular plan to invest with.

Drawing from this success, a few fund houses have launched daily SIPs in India. The new product plans to collect a small sum from an individual on a daily basis and invest in the market, much like depositing a penny in a piggy bank. To help you decode the new product, here’s a pocket guide on daily SIPs and things you must keep in mind before investing in it.

RIDING HIGHS & LOWS
For starters, SIPs allow one to contribute money to a fund on a uniform basis and help average out the peaks and dips in the market over the long term. The benefits of investing via SIP route get amplified in case of a daily SIP where investments are scheduled daily. “It captures the daily levels of market volatility. It not only ensures that one is invested at the highs and the lows but also makes the best out of an opportunity that could be tough to predict in advance,” feels Krishnan Sitaraman, director, fund services at Crisil.

Financial planners say the daily SIP scores over the monthly one as it provides larger benefits of rupee cost averaging. In case of a monthly SIP, you still can lose out if the markets are up on the chosen day of the month. The daily SIP, however, eliminates this flaw and lets you benefit out of equity market volatility.

The scheme, they say, can be even used as an “effective tool” for those who are looking to make a lump sum investment. “One could let market volatility play to their benefit by splitting the lump sum amount in to daily instalments over a relatively short time frame. This strategy avoids market timing and helps rupee cost averaging also,” says Mukesh Gupta, a certified financial planner and director of Wealthcare Securities.

For small time savers, the product offers a very small threshold investment level to invest in mutual funds. The regular stream of investments even passes on the benefits of compounding. Further, the product brings in an element of financial discipline. Currently, Bharti AXA Investment Managers and ING Investment Management have mutual fund schemes in the market that invest an individual’s money on a daily basis in the equities. Sahara Mutual Fund too plans to launch a similar product soon where it proposes a minimum investment of Rs 10 a day.

LOOK BEFORE YOU LEAP
It is important for you to check if there are any incremental transaction charges to complete each investment instalment in case of daily SIPs. Usually, a fund charges 2.25% of invested amount as the ‘entry load’. However, in some cases this amount may get reduced. You should also keep in mind the contribution after taking into account the cash flows available.

Divya Baweja, partner, BMR Advisors, however, is not too smitten by the idea of daily SIPs. “It is administratively cumbersome to get in to a
daily SIP, since you need to monitor this on a daily basis. At this stage, the success of daily SIP needs to be tested,” she feels.Financial planners believe you should ideally remain invested in a daily SIP at least for three years to reap dividends. “Historical evidences show probability of having negative return over a four-year period is almost negligible,” Gupta says.

STACK UP
ING Investment Management was the first fund house in India to launch this unique feature as part of their offering, Zoom Investment Pack or ZIP. Under the scheme, investors’ money was collected as a lump sum and allocated on a regular basis in the market than at one go. It requires a minimum investment of Rs 5,000 and you can choose to invest just Rs 99 per day. However, in case of Bharti AXA Mutual Fund, you are required to shell out a minimum Rs 300 per day that sums up to Rs 6,600 per month (for 22 working days).

“It operates like any other mutual fund. The money after getting in to the fund is at the prerogative of the fund manager. It is his discretion whether he wants invest the money in the market on the same day or later,” Vikaas Sachdeva, country head for business development, Bharti AXA Investment Managers, explains.

On the other hand, the Sahara daily SIP plans to raise money 365 days a year irrespective of any holidays. The fund proposes to infuse the money on a daily basis in the market. The two daily SIPs have so far proved to be successful in generating retail interest, now it remains to be seen how far a penny a day can take you.