MF Entry loads go, What about Insurance Products?

SEBI has recently passed notification that starting 1 August 2009, entry load on all MF schemes will go. Earlier, the entry load, usually in the range of 2.25%, used to be the upfront commission of the broker/advisor. What that meant was that for an investor investing Rs.100/-, Rs.97.75/- went to actual investment and Rs.2.25 was paid to the distributor. This understandably has brought a lot of cheers to the investing community. More deployment means more returns and correspondingly higher amounts at maturity. For an investor putting in Rs.1 Lac lumpsum for 15 years, the maturity amount would be Rs.7,95,398/- with entry load and Rs.8,13,706/- without entry load, a neat difference of Rs.18,308/-(assuming 15% growth). The difference would be more pronounced in case of SIPs. Let us assume an investor investing Rs.5000/- pm in a mutual fund gorwing at 15% pa. The investment horizon is 10 years. The maturity amount would be Rs. 13,45,123 entry load and Rs.13,76,085/- without entry load a difference of Rs.30,961/-.

Loss of upfront commission obviously has distributors up in arms against this order. They fear the loss of livelihood since now they have to negotiate with the customer regarding their commission which will be paid by the investor directly to them through separate cheque. Although there are some procedural hassles in this format, it sure is a welcome step since now investor can decide the quantum of commission paid to broker/advisor/distributor based on SERVICES PROVIDED. This is in contrast to the earlier method where the seller was assured of commission, service or no service. This step will lead to much more maturity in market and lead to drastic reduction in two of the biggest menaces of Mutual Fund Investing. First was the illegal payback/rebating of commission by brokers back to the investor. Second was unjustified churning of mutual fund holdings. The smart distributors made unsuspecting clients sell their existing mutual fund holdings and put in the money in New Fund Offers (NFO) since the NFO gave them much higher commission to the tune of 5-6%. Hopefully, these have now become things of the past.