Ban on entry load effective from August 1st, 2009

Brief History
• Most equity mutual funds charge retail investors an entry load of 2.25% on their investments. This entry load is mandatorily payable irrespective of an investor's mode of entry.
• The total amount collected as load for each scheme, as per SEBI stipulations, has to be maintained in a separate account by AMCs and can be utilised to meet selling and distribution expenses. As per industry practice, the load is normally utilised for paying the agent/ distributor's commission.
• SEBI had earlier decided that there will be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors should be paid by the investor to the distributor directly. Moreover, the distributors should disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.
• MF distributors are against this because its gives investors the right to negotiate commissions while buying MF products through them.
• MFs are against this because entry load helped it to meet selling and distribution expenses.

Ban on entry load effective from August 1st, 2009
Now, SEBI vide its Circular SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009 has given effect to this decision. The major points in this circular are summarized below: -
• There shall be no entry load for all mutual fund schemes.
• The scheme application forms should carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.
• Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds should be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance should be credited to the scheme immediately.
• The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.

All these decisions are applicable to investments in and redemptions from mutual fund schemes from August 1st, 2009. New mutual fund schemes and Systematic Investment Plans (SIP) launched on or after August 1, 2009 will also have to comply with these rules.

A copy of the circular is available here.