Posts Tagged ‘no-entry load’

Sebi’s Another Jolt to the Fund Houses – MF Exit Load for 1st Year !!

MF Exit Load Charges


Within weeks of shaking up the mutual fund industry by abolishing entry load in all schemes and moving to a uniform exit load regime, Sebi has given another jolt to the fund houses.

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The Securities and Exchange Board of India (Sebi), in a meeting with mutual fund heads, has recommended that the tenure for charging of exit loads be made uniform at one year.

This move is seen as Beneficial for Investors.

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Sebi suggested fund houses to move to a regime of charging exit loads only for the first year of investments.

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After Sebi mandated that all entry loads should go and exit loads should be uniform across-the-board, fund houses had gone into a rejig mode with their finances so that they could compensate MF distributors.

The change in the compensation structure was done with the assumption that exit loads could be there for perpetuity.

But โ€œthe recent Sebi suggestion on exit load has sent all those changes to the compensation structure for a toss,โ€™โ€™ said a top official at a fund house.

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The Sebi chairman C B Bhave advised that increasing the exit tenure beyond a year would not be in keeping with investor interest.

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MF industry officials said that limiting exit load to a year could lead to increased inclination among investors to move out of a scheme if the returns over one year are good.

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Earlier, as part of the rejig exercise to change the compensation structure, a host of fund houses had increased exit load period.

Now if Sebiโ€™s advice becomes a rule, all those will have to be reversed, industry players said.

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However, as the CEO of a fund house pointed out that so far Sebi has not come out with any formal letter. โ€œItโ€™s still evolving. I believe a lot of things can happen before it is formally notified,โ€™โ€™ said the fund house CEO.

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Within weeks of shaking up the mutual fund industry by abolishing entry load in all schemes and moving to a uniform exit load regime, Sebi has given another jolt to the fund houses.

The Securities and Exchange Board of India (Sebi), in a meeting with mutual fund heads held on Tuesday, has recommended that the tenure for charging of exit loads be made uniform at one year.

In a late evening meeting on Tuesday, Sebi suggested fund houses to move to a regime of charging exit loads only for the first year of investments.

After Sebi mandated that all entry loads should go and exit loads should be uniform across-the-board, fund houses had gone into a rejig mode with their finances so that they could compensate MF distributors.

The change in the compensation structure was done with the assumption that exit loads could be there for perpetuity.

But โ€œthe recent Sebi suggestion on exit load has sent all those changes to the compensation structure for a toss,โ€™โ€™ said a top official at a fund house.

โ€œOur capacity to pay to the distributors will reduce substantially,โ€™โ€™ said the head of a local fund house.

“The Sebi chairman C B Bhave advised that increasing the exit tenure beyond a year would not be in keeping with investor interest,”

MF industry officials said that limiting exit load to a year could lead to increased inclination among investors to move out of a scheme if the returns over one year are good.

Earlier, as part of the rejig exercise to change the compensation structure, a host of fund houses had increased exit load period.

Now if Sebiโ€™s advice becomes a rule, all those will have to be reversed, industry players said.

However, as the CEO of a fund house pointed out that so far Sebi has not come out with any formal letter. โ€œItโ€™s still evolving. I believe a lot of things can happen before it is formally notified,โ€™โ€™ said the fund house CEO.

Sebiโ€™s MF ruling may lead to service tax loss !

Mutual funds

Sebiโ€™s decision to abolish entry loads in all mutual fund (MF) schemes can have certain implications as discussed below :

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While there could be huge slippages of service tax paid by the fund industry, it could also lead to proliferation of bogus independent financial advisors (IFAs) without proper certification, and in turn mis-selling of MF schemes, industry officials said.

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They also believe that in the long run, the decision could lead to cartelisation in the MF industry with just a handful of large funds houses and distributors ruling the market.

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Currently, when an investor opts for a scheme, the fund house directly deducts service tax from the commission it pays to the distributor or IFA.
In turn, the fund house deposits this with the government.

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But very soon, fund houses will not have anything to do with the service tax over distribution commission, since under the new structure, investors will pay the commission directly to the distributor/IFA.
So the onus of paying service tax will now be on the distributor/IFA.

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Chances are that there will be substantial leakage of revenue for government through under-reporting or non-reporting of advisory commission,โ€™โ€™ said a top fund industry official at an AMC.

Industry estimates that in the last financial year total service tax paid by the fund houses was about Rs 160 crore. โ€˜โ€˜A large chunk of this could remain with advisors nowโ€™โ€™ the official pointed out.

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Another fallout of the changed fee structure could be proliferation of advisors without proper training and registration in the fund industry.

After this ruling and change, anyone can become an advisor and charge the investor for advice,โ€™โ€™ a top official at a local fund house said.

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Another fallout could be squeezing out of AMCs and distributors with limited financial resources and growth of larger players.
In the changed scenario of no entry load, AMCs will have lesser funds at their disposal for marketing and business expansion.

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The fund industry is on way to suggests a way to get out of this situation.

Stay tuned ! ๐Ÿ™‚

ULIP Cap: Advisors To Feel The Heat, Tough Times Ahead !

ULIP cap: Advisors To Feel The Heat

After Mutual Fund (MF) agents, it is the turn of Insurance Advisors to feel the heat. ๐Ÿ˜ฆ

If the recent IRDA notification capping charges on Unit Linked Insurance Plans (ULIPs) also includes Premium Allocation Charges, it may be the end of lucrative first year premium for insurance advisors.

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However, the good news is that financial experts are not sure at the moment whether the new notification also covers premium allocation charges.

Only a few believe that it does.

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According to the notification, the difference between the โ€˜gross yieldโ€™ and โ€˜net yieldโ€™ of ULIPs shouldnโ€™t exceed 3% for policies of less than 10 years and 2.25% for longer term policies.

Gross yield is the fundโ€™s returns on investment and net yield is what it gives to the policyholder.

Of these, fund management charges are capped at 1.5% for the shorter-term policies and 1.25% for longer-term ones.

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There is a lot of confusion about whether the cap on charges applies year-onyear or on a cumulative basis over the years. :O

It is not clear whether the cap includes premium allocation also. ๐Ÿ˜ฆ

The IRDA circular comes into effect from October 1, and all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31 by insurance companies. ๐Ÿ™‚

In case the cap on difference between gross and net yields applies to everything, including premium allocation charges,

then it could bad news for insurance agents who were making a killing by pushing ULIPs, which used to pay hefty commissions in the initial three years of the policy.

In fact, thanks to the fancy commissions, today around 80% of the policies sold are ULIPs. ๐Ÿ™‚

As for investors, the next few months are going to be trying times. ๐Ÿ˜ฆ

From August 1, the Sebi directive of no-entry load on mutual funds have taken form. ๐Ÿ™‚