No-load funds are here

Isn't it sad that you did the research on various mutual funds, zeroed in on a few, filled the forms and submitted them, all by yourself, but still had to pay the upfront charges that would eventually be passed onto agents? Not any more. 

The Securities and Exchange Board of India has scrapped entry loads on direct applications to MFs. This means that if you invest directly with the fund house by submitting your application forms at any of its collection centres, you don't need to pay entry loads (presently 2.25 per cent).

Internet transactions done through the MF's website are also now exempt of loads. However, if you apply to MFs through an agent, you will continue to pay the entry loads. No-load options will now be available in all existing schemes as well as new schemes.

The power of compounding. A 2.25 per cent entry load sounds small, especially at times when the market has returned 50 per cent a year. But it still bites a chunk off your returns over a long period of time. For instance, Rs 100,000 invested directly in the no-load option of an equity fund that grows at a rate of 15 per cent over a period of 20 years yields around Rs 16.36 lakh (Rs 1.636 million) against Rs 15.99 lakh (Rs 1.599 million) that a load fund would return -- a difference of Rs 36,820 (see: Light Weight). This is because even a small sum of 2.25 per cent gets compounded over the years. 

The pinch remains the same even in a systematic investment plan. As SIPs entail investments on a regular basis, say every month, you end up paying entry loads on all your investment instalments. Assume you had invested Rs 5,000 in Reliance Vision Fund on January 1 2003 through a monthly SIP.

If you had withdrawn your entire investment after five years, on December 31, 2007, you would have got back Rs 11.52 lakh (Rs 1.15 million) in the no-load option and Rs 11.25 lakh (Rs 1.12 million) in a load option, a difference of a cool Rs 25,914. 

Says certified financial planner Jayant Pai: "This is a bold step and would help informed investors to approach MFs directly, without unnecessarily paying the agent commission."

Adds Ranjeet S. Mudholkar, CEO, Financial Planning Services Board, India: "It promotes financial planning as those agents who were merely form vendors till now will need to upgrade their skills and offer complete financial planning to their clients. They now need to earn their 2.25 per cent 
of commission."

Fears. Though many MFs, distributors and financial planners have welcomed the move, a section of the industry is worried. They feel that some investors might consult a financial planner, but then invest directly with the MF, thereby avoiding entry load. "This is possible, but agents are also vigilant and will come to avoid such investors eventually", says Pai. 

Most agents and MFs feel that investors will not mind paying entry loads to quality agents and financial planners who service them well. And apart from a miniscule portion of investors, who invest through the Internet, most find it tedious to visit MF offices every time they want to invest or withdraw. 

Should you opt for no-loads? We will say this unabashedly -- if you have been reading Outlook Money, you know this already that no-loads offer a better proposition unless you employ a financial planner who takes care of your entire investment portfolio. 

If you rely on these pages to guide you through the MF maze taking cues from picks, recommendations and Outlook Money annual mutual fund rankings and star ratings, a no-load option looks attractive. Plus, with the insurance regulator mandating insurance agents to provide additional transparency in disclosing costs to investors, it won't be easy for agents to shift to selling unit-linked insurance plans from MFs.