Mutual Fund: invest with caution and through right channel

I do not usually like to repeat information and news, but this one is good enough for the investors who have deep trust and faith in the Mutual fund investments.

I have always been against the charges that are taken from the investors in the name of fund management, entry load, exit load, distribution costs, etc. and that is why I always say that better to go for ETF’s instead of Mutual Funds. However, some respite is being offered by SEBI to the mutual fund investors.

As a new year gift to the investors,The SEBI has finally approved of waiving off the mutual fund investment entry load charges. What this means is the entry load charges when you invest into by buying a mutual fund units will not be applicable. This will save you something like 2.5% of your money.

However, there is an important point to understand clearly about investments in Mutual funds and getting the entry load waiver. The condition is that you MUST directly apply to the Mutual Fund house, instead of routing your application through your broker or agent. This point is very important to understand because people are still under the impression that if they have an online trading account with a broker, they can simply apply online for any mutual fund and they will not be charged any entry load.

My understanding is that this is NOT the case. Please verify it by calling your broker.

The mutual fund entry load charges will be waived off IF AND ONLY IF, you apply directly to the Mutual Fund company, (Mutual Fund AMC or Asset Management Company), which is offering the mutual fund. Hence, if I am willing to invest in the HDFC mutual fund, then I MUST apply directly on the website of HDFC mutual fund, by using my debit card. OR, I should go to the office of HDFC Mutual Fund in my city and fill in a paper form and submit a check to apply.

As per my understanding, if my stock broker allows me to apply for mutual funds through online trading on his website (like icicidirect.com or sharekhan.com) and I apply through my online brokerage account, then I WILL be charged the entry load. The reason is that even if I am applying online, the online application is being routed through my broker (or his website), hence it is NOT a direct application, so I should not get any entry load waiver. Please verify it with your broker and confirm whether you will be charged entry load or not. (The above is as per my understanding of rules).

Who would be affected? It will be the agents and middlemen who have been making around 4% to 8% of money who will loose their business. Secondly, the small fund houses who do not have online application facility and do not have significant presence in different parts of the country will be affected, because they rely upon these agents to sell their mutual fund products. However, in the name of saving the entry load money, the investors will now apply directly to the fund houses or AMCs and so these small funds with limited presence and no online application facility will be hurt.

Still the problem may not be solved. They entry load has been vanished, but it is possible that the mutual fund industry, which is the bread and butter of stock brokers and agents, may come up with some other charges, or increase the exit load charges and so on to recover the cost. No guarantee how the market will work – its only in a name.

Invest wisely, first understand the rules and act accordingly! Wishing everyone a New Year with healthy and fruitful returns!

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