There are hardly, few people who actually have made difference in your life & you would definitely love to remember such people. And if I talk about my life, Mr C B Bhave, Chairman SEBI holds very high place in that list. He helped me as an investor & also as an advisor.
His decision of removing entry load was a milestone (for some it was the dead end board) in Indian Mutual Fund Industry. At that time I wrote one article that never got published anywhere as I was not having freedom of speech (At that time I was working with Mutual Fund Company). But this article got engraved in my heart.
I think that frustration of ‘not expressing & my passion towards personal finances guided me to start The Financial Literates & my own financial planning firm. Our first article was “Mis-selling Month” clearly hinting towards what is going to happen with you – but at that time we had hardly any readers.
Read this article – this was written on 2nd July 2009 but still holds true.
Great move of SEBI by introducing ‘No Entry Load’
SEBI took a great decision. ‘Brave Heart’ Mr. Bhave.
This will completely change the way financial advice would be delivered in future – industry shifting from commission based to fee based Advice. This is the healthiest thing that has ever happened to the craft of advice, but it needs a sea change in the way advisor relate to their Clients.
We would like to share our views on this irreversible change:-
- In the present system, the way financial services are delivered, is by way of agency model and not by way of financial advisory. Most of the so called service providers are basically product providers. This entire concept was wrong and this move will rectify the problems associated to this industry in the times to come.
- If we look at the Equity Asset Under Management (AUM) growth of the industry, it was Rs.24000 crore as on June 1st, 2000. As on today we are just above 140000 crore.
It was even less than 1 lac crore during the worst time of Market in 2009.
If we are not wrong the AUM, if would have left untouched in some good funds, then also we would have achieved the same AUM or probably more. Average Return of diversified equity funds from June 1st, 2000 more than 18 % per annum and the best fund gave over 30% per annum return.
So what efforts the industry and the distributors have taken to increase the market. Because of Entry load and excessive remuneration offered, the money kept churning from one scheme to another.
If we look at the growth of Insurance Industry, they are growing because they keep looking for new money in the system. But most of the Mutual Fund distributors were interested in sharing the existing cake itself. The Mutual Fund industry needs to make efforts to increase the size of the cake.
Let us share some data to highlight this real issue that would probably be shocking to most of the readers.
(From June 1st, 2000 to May 31st, 2009)
|NFO Sales||Regular Sales||Total Sales||Redemptions||Net Sales|
(All figures in crore)
We have not taken Dividend Payout into consideration for these calculations. If we would have taken that, the additional investments figures would be close to zero.
Can you imagine what cost investor paid during this period for this snail pace growth. Believe it or not it is more than 9000 crore (411717 * 2.25% = 9264 crore).
- SEBI being the regulator must see that the growth of the industry takes place and not just the growth of the distributor alone.
By introducing no entry load and restricting exit load to 1% for marketing and distribution expenses, the regulator is trying to make an effort that both investors and distributors are satisfied.
In any service industry the price of the service is dependent on the quality of service and terms and condition between the user and the provider and now same will happen in MF industry also.
- Many people say that this move by SEBI will hamper the growth of Mutual Fund industry. We believe Mr. Bhave is 100 % right when he says that he doesn’t want the growth of the industry by wrong methods. Take for example NFOs: Reckless introduction of NFOs by AMCs have lead to huge churning in the industry. Had the industry think tankers thought of a longer version of the game then they would have garnered more fresh money in existing schemes which would have been solid growth. For investors and for the industry overall this new regulation will bring good business sense. There would be reduced level of churning & entire industry will concentrate on creating large asset base by selling good existing schemes.
- Those AMCs which encouraged hot money will now be forced to work on their long term AUM. More stress will be given on SIPs and retail money. Every one in the industry who ate more and did less exercise, time has come for them to shed load and get fit. Now more efforts shall be put for ‘Investor’s Financial Literacy and Low cost Distributor training’.
This tectonic change in the mutual fund distribution model will have its ripple effect in all the financial products sold in India. Insurance industry where the maximum wrong selling takes place shall be forced to change its distribution structure in times to come.
Finally we would like to conclude that this change will take us to new heights, but we all have to change; need be AMCs, Distributors or the final consumer i.e., THE GREAT INDIAN CUSTOMER.
“He who rejects change is the architect of decay. The only human institution which rejects progress is the cemetery.” Harold Wilson
There is n no of policy changes that happened in his time – hope you also remember his famous fight for ULIPs which shook India.
3 years is a very short term to bring changes (if we actually see some bureaucrats & politicians who are sitting on SINHASANS from last 30 years) but he made the difference in everyone’s life.
List of his fans is countless. Do you think Mr Bhave affected you in some way? Express yourself.