Changes in Mutual Funds Fee Structure

The Securities Exchange Board of India (SEBI), has instituted a new regulation which will take effect from August 1, 2009, which has an immediate impact on what you pay whenever you buy a mutual fund scheme.

Now, technically speaking what all buyers of mutual fund schemes were paying the distributors, in industry jargon is called ‘entry load’. Typically this is 2.25% of the total amount taken from the amount you invested in most Equity based mutual fund schemes.

To illustrate this better by way of an example – Iet us say you invested Rs. 1,00,000/- in an equity based mutual fund scheme. Out of this Rs. 1,00,000, an amount of Rs. 2,250/- (i.e. 2.25%) was earmarked as sales commission to the distributor of the scheme. What this means is the amount that you invested is actually Rs. 97,750/- (i.e. Rs. 1,00,000/- minus Rs. 2,250/-).

With effect from August 1, 2009, your entire Rs. 1,00,000/- will be invested in the mutual fund scheme that you choose. This will immediately improve your return by 2.25% from this investment in the first year itself.

Now you would naturally be wondering how will the distributor get his revenue. The answer is that, in accordance with the new SEBI regulations, the distributor will now have to communicate to investors any upfront commission payable to distributors by the investor. Such fees will be based on investor assessment of various factors including services rendered by the distributor. While each distributor will have his own charges that he has to mandatorily communicate to his customers,

ICICI Direct Structure

Scenario 1: If the cumulative MF holdings you have with us is more than Rs. 8 lakhs, you actually pay Nothing.

Mutual Funds – Fee Structure Rs. per transaction
For SIPs Nil
For Lumpsum investments Nil

To illustrate this with the help of some examples

On Investing… Entry Load (A) Entry Load (B) Savings (A-B)
  Old Structure (Rs.)* New Structure (Rs.) Net Savings in New Structure (Rs.)
Rs. 75,000/- as a monthly SIPs for 12 months 20,250/- Nil 20,250/-
Rs. 8,00,000/- as a lumpsum in Mutual Fund 18,000/- Nil 18,000/-
*Old structure charges have been calculated @2.25% Entry Load as an illustration

 

Scenario 2: If the cumulative MF holdings you have with us is less than Rs. 8 lakhs, you only pay nominal charges on each transaction.

Mutual Funds – Fee Structure Rs. per transaction
For SIPs 30
For Lumpsum investments 100

To illustrate this better:

On Investing… Entry Load (A) Entry Load (B) Savings (A-B)
  Old Structure (Rs.)* New Structure (Rs.) Net Savings in New Structure (Rs.)
Rs. 10,000/- as a monthly SIPs for 12 months 2,700/- 360/- 2,340/-
Rs. 1,00,000/- as a lumpsum in Mutual Fund 2,250/- 100/- 2,150/-
*Old structure charges have been calculated @2.25% Entry Load as an illustration

Further, as per the SEBI guidelines, all distributors will have to disclose the commission payouts that they get from the Asset Management Companies.

Relevant extract of the SEBI circular released on June 30, 2009 (SEBI/IMD/CIR No. 4/168230/09) is as follows:

In order to empower the investors in deciding the commission paid to distributors in accordance with the level of service received, to bring about more transparency in payment of commissions and to incentivise long term investment, it has been decided that:

There shall be no entry load for all mutual fund schemes.

The scheme application forms shall carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately

The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor

This circular shall be applicable for :

Investments in mutual fund schemes (including additional purchases and

switch-in to a scheme from other schemes) with effect from August 1, 2009

Redemptions from mutual fund schemes (including switch-out from other schemes) with effect from August 1, 2009

New mutual fund schemes launched on and after August 1, 2009; and

Systematic Investment Plans (SIPs) registered on or after August 1, 2009

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  • Bharatha

    So, what happens if I wish to invest Rs. 500 in SIP? Do you mean that I now pay 6% as commission? Also, if I have Rs. 2500 and have to invest this in a MF then I pay Rs. 100 as commission (Entry Load) which is 4.0 %. Wow, I think we should keep away from ICICI direct guys.

  • Bharatha

    So, what happens if I wish to invest Rs. 500 in SIP? Do you mean that I now pay 6% as commission? Also, if I have Rs. 2500 and have to invest this in a MF then I pay Rs. 100 as commission (Entry Load) which is 4.0 %. Wow, I think we should keep away from ICICI direct guys.

  • Banyan Financial Advisors

    Actually the situation is now changed. Have a look at the revised version of the charge structures in place by different fund houses in India Interesting and detailed note on mutual fund charges / commissions.http://insight.banyanfa.com/?p=142