MUMBAI: A mutual fund investment will no longer be such a heavy cross to bear. A small investor’s campaign to keep bonus units and reinvestments free of any charge has borne fruit after three years. The investor, VT Gokhale, told ET that the Securities and Exchange Board of India has written to him saying entry and exit loads should not be charged for units given as bonus or against reinvested dividends. This means only original investments can attract a levy, and all further gains will accrue to the investor — without any cuts.
“It’s a major victory for investors who have been helplessly losing a part of their legitimate earnings for no reason,” Mr Gokhale said. SEBI had, a few days back, communicated to Mr Gokhale a decision taken by Association of Mutual Funds in India (AMFI), not to charge entry/exit load on dividends. “SEBI has accepted the AMFI recommendation,” says the communiqué from the market regulator, a copy of which is with ET.
SEBI recently proposed that investments done directly — that is, without an agent — shall not attract an entry load, typically about 2% of the proposed investment. That, coupled with the latest communication, should make mutual funds cheaper for investors.
An entry load is a charge an investor pays for buying mutual fund units and the exit load is what he pays for selling them. Having entered a scheme once, investors earn dividends that they can take in cash or put back into the scheme to get more units. Occasionally, the fund manager converts earnings from the scheme into units and distributes them to the investor proportionately. Mr Gokhale pointed out that a bonus or dividend would amount to gains from such investments and not a further purchase.
Currently, some fund houses charge exit loads on these reward units as well, if redeemed before a certain period. In effect, the fund is charging an exit load on an investor’s initial investment as well as the reward units. “This is highly unethical,” Mr Gokhale said.
He took up the matter with SEBI in April 2005. His case related to UTI’s children career plan that had charged him an exit load of Rs 1,198.22 on additional units. After his protest, the fund house refunded him the amount, but didn’t address the issue. Currently, all open ended funds charge an exit load if the investments are redeemed before a certain period — usually six months. This is done to discourage the investor from rapidly churning his investments in the fund, as it could affect the fund’s stability.
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