Much ado about 'no entry load'

All right. So, the Securities and Exchange Board of India (SEBI) has decided that mutual funds will no longer be permitted to charge an entry load. And all hell has broken loose! Newspapers are carrying articles with comments from 'experts' and 'senior officials' at fund houses running down the move; a lot of emphasis is being laid on how this step will hurt the mutual fund industry. But is that correct? Can a step that is evidently pro-investor be detrimental to the industry?

Let's take a look at what SEBI has proposed. Following is an extract from a press release posted on SEBI's website:

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors."

The guideline suggests that the practice of fund houses deducting an entry load (from the sum invested) and paying the same to distributors (investment agents/advisors) as upfront commission will be discontinued. Instead, the investor will have to compensate the distributor for the services rendered. Also, distributors shall be obliged to reveal the total commission they earn from various mutual funds.

So let's see, what's causing all the hoopla? Have distributors been deprived of their livelihood? Does the regulation suggest that henceforth distributors will have to treat selling mutual funds as a philanthropic activity? No. So why all the fuss? Here's why. Thanks to this step, distributors have been made accountable. They can no longer operate with a "the more I sell, the more I will earn" mindset. With an assured income of 2.25% or thereabouts from the entry load, aspects like quality of advice and service were rarely granted any importance. However, that modus operandi is now history. Several distributors will have to kiss a tearful goodbye to the 'easy money' route. And this is where all the agony stems from!

Any distributor who is confident about the quality of services he offers, should welcome this step. Nowhere does the guideline suggest how much income the distributor can demand from the investor. So if the distributor provides quality advice that is consistently in the investor's best interests and backs it with top-notch service, he could potentially demand more than the 2.25% that was available to him via the erstwhile entry load. Hardly a reason to complain!

Now for the second part of the guideline - disclosing all commission earnings. Again, distributors only have themselves to blame. Having built a reputation for selling mutual funds that offer them the highest commission, mis-selling continues to be common practice in the mutual fund industry. SEBI is simply trying to incorporate greater transparency in the investor-distributor association. Distributors who do not engage in any malpractice have no reason to fear. They should be able to justify why they are recommending a given fund vis-à-vis another.

Some fund houses are apparently aggrieved since they believe that the mutual fund industry will suffer, since distributors will gravitate towards insurance products offering better commission. Hence fund houses will end up with lesser assets to manage. Of course, a smaller asset size translates into lesser income for the fund house.

Here's a counterargument - if the mutual funds on offer are attractive enough and can aid the investor in achieving his investment goals, he will demand them and thereby create a demand. And the onus to ensure that funds are attractive lies primarily with the fund house. Also, if a fund house feels that distributors deserve to be better compensated, it is free to cough up additional benefits out of its own pockets. Remember the regulator only stipulates how much expenses can be charged to the fund (i.e. borne by the investor). Any fund house/AMC which believes that distributors are being short-changed, should feel free to reward them out of its own coffers.

Time and again, fund houses have failed to act in the best interests of the investor. Their partisan attitude towards distributors and indifference towards investors has been disappointing to say the least. Let's hope this time around better sense prevails and they don't create any roadblocks in the implementation of this directive.

As for investors, they couldn't ask for more. First, they were given the opportunity to invest directly with the fund house, thereby bypassing the distributor and avoid paying an entry load. Now with the guideline to scrap the entry load, they can negotiate with the distributor and arrive at a fair price for the latter's services. The onus to make the most of this opportunity lies with investors.

Kudos to SEBI for taking a stand for investors!

Distributors and fund houses - keep your chin up. This round goes to investors!

5 investment tips from Batman

Surprised to read about Batman and investments in the same sentence? Don't be. Not many would associate a comic book character with investing. However, there's a lot that investors can learn from the Dark Knight and his modus operandi.

Here are 5 investment tips from Batman.

1. No super powers, but he's still a super hero!

Interesting, isn't it, Batman has no super powers. Unlike his fellow caped crusaders, he can't fly; neither can he spin a web and swing across buildings. In effect, he is a super hero with no super powers. All he relies on are his physical and mental skills like a mere mortal. And yet, he emerges a winner every time.

Similarly, investors must appreciate that they don't need to be 'investment gurus' to achieve their financial goals. All they need to do is, invest in a disciplined manner and keep things simple at all times. For instance, investors should be unambiguously aware of their investment objectives i.e. what they want to achieve via their investments. Also, they must understand the characteristics of the investment avenues deployed i.e. the pros and cons. Having a contingency plan i.e. a 'plan B' is vital as well. There's no reason investors can't succeed, if they stick to the basics of investing and adopt a diligent approach.

2. The omnipresent Batsuit and Batmobile, among other gadgets

Ever noticed how Batman uses a plethora of gadgets. But primary among them are the Batsuit (with the utility belt) and the Batmobile. No matter what the situation, the aforementioned always have a role to play. While other gadgets keep appearing in an intermittent manner, these are the mainstays of his arsenal.

Investors must ensure that they have a solid core portfolio in place. It can be comprised of various avenues like mutual funds that have stood the test of time, bonds/instruments backed by a sovereign guarantee. Gold must find place in every portfolio from an asset allocation perspective. Although not in the domain of investments, the importance of being adequately insured cannot be overstated. A term plan is an ideal way to acquire a substantial insurance cover at a low cost. Opting for medical insurance is pertinent too. Once a solid core portfolio has been built, other avenues can be included in the portfolio, depending their suitability for the investor.

3. Robin and Alfred to the rescue …

Despite the fact that he's a bonafide super hero, Batman is never short on allies. For example, for advice, he turns to his mentor Alfred, who also doubles up as his butler. And, when its time for action, Batman's protégé Robin isn't far away. Commissioner Gordon and Lucius Fox have a part to play in Batman's crime-fighting escapades too.

For investors, the most important ally is the investment advisor/financial planner. This individual should act as the bridge between investors and their financial goals. He is required to have a fair degree of expertise as far as investments go and must consistently work in the investor's interests. Investors on their part must ensure that they are always associated with a competent and committed investment advisor.

4. Batman preys at night

Unlike other super heroes who operate in broad daylight, Batman preys at night. In fact, he uses the cloak of darkness to his advantage. In other words, he steers clear of the herd mentality and adopts an approach that is suited to him. That makes Batman, a bit of a contrarian vis-à-vis his peers.

It is not uncommon for investors to get swayed by trends and popular opinion while making investment decisions. Over the past few years, avenues like tech stocks/funds, ULIPs (unit linked insurance plans) and NFOs (new fund offers), among others have at various points in time, captured the investor's fancy. Several investors have been guilty of getting invested without fully understanding the investment proposition on offer or evaluating the suitability. Typically, this phenomenon can be attributed to herd mentality i.e. investors got invested simply because everyone around them was doing so. It is important for investors to make investment decisions based on what is right for them, rather what everyone around them is doing.

5. The baddies keep coming back …

Batman has to contend with an impressive list of super villains - the Joker, the Penguin, Two-face, the Riddler, to name a few. Sure, Batman beats them every time, but they keep coming back. And the eternal battle between good and evil continues like an ongoing saga.

It's no different with investments. The process never really comes to an end, not even for investors who may have that ideal portfolio in place. Changing economic environment and risk appetite are some of the factors that necessitate a constant review of one's investment portfolio. A fulfilled need will be replaced by the emergence of a new one. Investors would do well to appreciate that investing is not a one-off activity. This in turn, reinforces the need to devote adequate time to the investment exercise.

Clearly, there's a lot that one can learn about investing from the Dark Knight. From an investor's perspective, the key lies in utilising these pointers to achieve his financial goals.