Senior central government officials, along with capital market regulator Sebi, on Saturday stressed that the transaction cost in mutual funds should be reduced.

While M S Sahu, director, Capital Market, ministry of finance, peaking at a meet on mutual funds in Bangalore said that this cost should be reduced so that there was more retail participation, Sebi's whole-time director T K Nair said the entry load was likely to be eliminated if an investor went directly to the mutual fund operator.

Both Sahu and Nair referred to the same issue at this meet which discussed aspects on how to fuel the growth of this industry. "Of the 3.2 million total investors in the mutual fund industry in India, only 4 per cent are retail investors. This has to change and it will happen only if the small investor is empowered through literacy and through elimination of entry load," Nair said. He said the Sebi was in talks with the Association of Mutual Funds in India (Amfi) and a decision to this effect was expected within the next 15 days.

Sahu and Nair also urged that mutual fund players should go beyond the 10 metros and try to spread financial literacy into towns and taluks so that there was comprehensive financial inclusion. "We have to make retail investors go beyond bank deposits. They should be enabled to participate in the capital markets," Sahu said.

Last month, the Sebi had brought out a concept paper proposing to do away with the entry load charged by mutual funds through the direct route. The proposal had suggested that mutual fund investors would not have to pay entry load for applications filed online or through asset management company's collection centres.

The proposal was open for public comments till September 12, 2007. The mutual fund industry is divided over the proposal as one section feels that it will hit the distribution business hard, while others opine that it will promote online transactions.

"It is an investor-friendly measure, as the distribution route leads to mis-selling, churning of portfolio, etc.," said a senior executive of Quantum Fund House that sells its products directly.