No Entry Load on Mutual Funds (06 Oct 2009)

No Entry Load on Mutual Funds: A blessing in disguise for the Indian Investor

Oct 06, 2009

As you might be aware, the Securities Exchange Board of India (SEBI) came out with a new regulation with effect from August 1, 2009 that has an immediate impact on what you pay whenever you buy a mutual fund scheme.

Until now, all purchases of Equity-based mutual fund schemes were subjected to an ‘entry load’ which was typically ranging between 2.25% to 2.50% of your investment in case of existing mutual fund schemes & approx. 3.50% of your investment in case of New Fund Offers (NFOs). This entry load was deducted from the amount that you invested and mostly passed on to your distributor as commission for his service.

Thus if you had invested Rs. 1,00,000 in an equity based mutual fund scheme, then typically an amount of Rs. 2,250 (assuming an entry load of 2.25%) was deducted from your investment and paid to your distributor towards his services & your actual investment amount stood at Rs. 97,750 (i.e. Rs 1,00,000 minus Rs. 2,250). But this was the case before Aug 1, 2009.

As per SEBI’s new ruling regarding abolishing of entry loads, any investment in equity based mutual fund made on or after August 1, 2009 would be free of any entry loads. What this means is that now if you invest Rs. 1,00,000 in equity based mutual fund schemes, your entire Rs. 100,000 would be invested in the scheme of your choice and nothing would be deducted on account of entry loads thus resulting in an absolute saving of Rs. 2,250 on Rs. 1 lakh investment (or around 2.25% of your investment amount).

Table showing the Impact of Entry Load abolition on your Investments

Particulars	Before Aug 01, 2009	From Aug 01, 2009
Your Investment (Rs.)	100,000	100,000
Assumed Rate of Return (CAGR % pa)	18%	18%
Entry Load (%)	2.25%	0.00%
Amount finally Invested (Rs.)	97,750	100,000
Value of your Investment	Before Aug 1, 2009	After Aug 1, 2009	Your Savings*
After 5 Years	223,625	228,625	5,000
After 10 Years	511,600	523,600	12,000
After 15 Years	1,170,435	1,197,435	27,000
After 20 Years	2,677,660	2,739,660	62,000
After 25 Years	6,125,850	6,266,850	141,000

• * Savings because of abolition of entry Loads
• ** For simplification purpose, it is assumed that there are no expense ratio

As is evident from the table above, an Indian investor can end up saving up to Rs. 141,000 on his investment of Rs. 100,000 over a period of 25 years. Not a small saving by any measure.

Now the question arises, what happens to the distributor’s commission? SEBI believes in empowering the investor and says that going forward, the Investor will decide his/her distributors remuneration based on the quality of advice given & service offered by the distributor or advisor. So it pays to choose your advisor wisely.

The approx. amount of 2.25% to 3.5% on his investment that an investor is able to save should be partially channelized by the investor to remunerate his Investment Advisor. Here is what I mean. In the post Aug 1, 2009 scenario, your Investment Advisor (if you have one) from whom you might purchase your Mutual Funds is hardly getting remunerated for his services as entry loads have been abolished and the Mutual Fund company is now forced to pay him/her from their own pocket. A wise investor should therefore choose a good Investment Advisor who is an expert on Mutual Fund matters and who is capable of making the right fund choices for him. However, a good financial advisor will charge you a fee for his expert advice. Should you pay him? The answer is a resounding YES.

You can utilize your saving from entry load to pay for a good financial advisor who would typically charge you fees in the range of 1% to 2% of your Investments. Hence, even though you are hiring the services of an expert financial advisor (something you could not afford earlier), you are still saving approx. 1% to 2% on your investment vis-à-vis before. And if the Investment Advisor that you have chosen can deliver even 2% better return compared to a non-expert, you can make a few lakhs more on your investment. Have a look at the table below.

Probable Impact of choosing an Expert Financial Advisor:

Particulars	Without an Expert	With an Expert Advisor
Your Investment (Rs.)	100,000	100,000
Assumed Rate of Return (CAGR % pa)	18%	20%*
Entry Load (%)	0.00%	0.00%
Investment Advisor’ Fees	0.00%	1.5%
Amount finally Invested (Rs.)**	100,000	100,000
Value of your Investment	Without an Expert	With an Expert Advisor	Additional Gain*
After 5 Years	228,625	245,100	16,475
After 10 Years	523,600	609,850	86,250
After 15 Years	1,197,435	1,517,500	320,065
After 20 Years	2,739,660	3,776,250	1,036,590
After 25 Years	6,266,850	9,396,000	3,129,150

• * It is assumed that the Expert will help you garner at least 2% extra returns (over the tenure of your Investment) compared to a non-expert.
• ** For simplification purpose, it is assumed that there is no expense ratio

Yes, believe it or not, even a 2% pa extra return on your investment delivered by an expert investment advisor can result in an extra profit of Rs. 30 odd lacs on your meager Rs. 1 lakh investment over 25 years.

The moral of the story is: IT MAKES GREAT SENSE TO PAY FOR A GOOD INVESTMENT ADVISOR & UTLIISE HIS EXPERTISE TO GARNER SOME EXTRA RETURN, EVEN AT THE COST OF PAYING HIS FEES. IT IS WORTH EVERY PENNY SPENT. So choose the right Financial advisor & laugh your way to the bank. HAPPY INVESTING.

(Mr. Nirav Panchmatia is a financial planner practicing under his firm “AUM Financial Advisors”. He is a CA & MBA Finance from Narsee Monjee, Mumbai having spent last 8 years in Mumbai working in leading financial institutions like Citigroup, ICICI Bank, IRIS, etc. He can be reached on 93237 39968 or on his email: nirav@aumfinancialadvisors.com. The above article is meant for general reading only)

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