You remember investing Rs 1,00,000 in a new fund offering of a mutual fund at Rs 10 per unit. You expect to get 10,000 units (Rs 1,00,000 divided by Rs 10) of the same but are shocked when you find about 200 units less in your account.
Do you know how and why this happens? It is very simple to begin with.
Most of the mutual funds that come up with a new scheme tax the investors by charging a fee that they call entry load. While this charge differs from one mutual fund scheme to another the standard practice is to charge a flat 2.25 per cent entry load on your initial investment.
This is how it works and for simplicity and comprehension let us assume that a mutual fund charges only a 2 per cent entry load (don't get carried away; this is just an assumption).
That is, for every Rs 100 that you invest the mutual fund company takes away Rs 2 as charges that they pay to distributors for distributing the fund.
By the way, distributor is an entity that helps you decide upon a good mutual fund but is not accountable (not all distributors are fly-by-night operators; there are good mutual fund distributors as well) if your investments go sour.
So for every Rs 1,00,000 that you invest in a mutual fund Rs 2,000 goes towards paying up the distributor who has advised you to select a particular fund and who will keep on assisting you in making such decisions in the future.
That is, a mutual fund would deduct this amount before investing your money into its scheme. This, however, denies the poor investor the chance of getting an additional 200 units (Rs 2,000 divided by Rs 10). There is no gain without the pain, you see.
But is there no way that an investor can be saved from this tax? Of course, there is. There are mutual fund companies like Quantum Asset Management that charges no loads on its schemes. That is, if you invest Rs 1,00,000 in their NFOs you will get 10,000 units unlike the example above.
Again if you invest directly on your own, like investing your money online (icicidirect.com and a host of other online brokerage houses that offer online applications in mutual funds) there is no load on your investments. Of course, then you don't get any expert advice (like that from distributors in the earlier example) and you have to put money at your own risk.
So how important are distributors in spreading the mutual fund investing culture amongst the ordinary investors like you and me?
Responding to a query raised by this correspondent during the launch of Franklin Asian Equity Fund (FAEF), Franklin Templeton India's President Vivek Kudwa said that choosing a distributor is like choosing a doctor.
"Like you don't trust your life to a doctor who's not good at her/his work or with whom you've had a bad experience in the similar manner mutual fund investors should choose their distributors after doing their home work."
There is no way that entry load is going to go away without much pain to the mutual fund industry, he added while reacting to the market regulator Securities and Exchange Board of India, Sebi's, recent proposal that entry and exit loads should be done away with.
While he did not actually rubbish the idea of zero load mutual funds he said that there is scope for entry and exit loads to come down in the near future. However, expecting mutual funds to come out with zero load mutual funds would be wishful thinking, he suggested.
According to him, we need distributors because they are a channel through which mutual funds can reach ordinary investors.
"Do you think that all mutual funds can open new offices in all important rural and urban centres across India?" As of today only 4 per cent of Indians invest in mutual funds and the mutual fund-distributor-investor chain will have to remain for this penetration to improve.
He said that investors should remember that investing in mutual funds can bear fruit only in the long term and advocated that investor should at least put their money into mutual funds for five years.
"If you were to amortise the entry load charge over a period of five years then the load will not pinch investors too much. And it is a small fee to be paid for getting an expert's advice (distributor).
Franklin Asian Equity Fund from FT (India) will invest in companies in the Asian region (ex-Japan) and Asia related companies across market capitalisation ranges. The NFO period will be from November 19, 2007 to December 18, 2007 and will open for trading on January 17, 2008.
The entry load for investments less than Rs 5 crore would be 2.25 per cent and nil for investments above that figure. The exit load will be 0.5 per cent if an investor sells his units within one year of allotment and 1 per cent if units are sold within six months of allotment.
The minimum amount that you can invest in this fund is Rs 5,000 and in multiples of Re. 1 thereafter. FAEF comes with two options: growth and dividend (payout and reinvestment) and investors can start a systematic investment plan in this fund on an ongoing basis.
Image: Vivek Kudva, President, Franklin Templeton, India
Photograph: Arun Patil
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