Facilitate long-term investment, not return of entry load: Dhirendra Kumar, CEO, Value Research

Dhirendra Kumar CEO, Value Research
Day zero of Manmohan Singh’s stint as finance minister brought unexpected but welcome attention to the state of mutual fund investing in India.

In his first reported statements on the things that must be done to revive the Indian economy, “issues surrounding the mutual fund industry” was prominently mentioned. If one is to go by the general buzz in the media as well as in the fund industry, these “issues” basically boil down to the reintroduction of entry load in mutual funds.

By these accounts, the malady affecting the fund industry is simple: ever since entry loads were removed in August 2009, investment flows into equity funds have dried up. And once you accept this simple diagnosis of the disease, then the course of treatment is obvious — the reintroduction of entry loads. However, as Mark Twain has quipped, “For every problem there is always a solution that is simple, obvious, and wrong.”

I’m not disputing that the end of entry load has been a factor in the poor business conditions in the fund industry. However, it doesn’t follow from that the way forward is to simply roll the clock back to July 2009 and reintroduce entry loads.

Back in 2009, the Securities and Exchange Board of India’s (Sebi) move was perfectly understandable under the circumstances. Excessive churning of investments for the purpose of generating commissions was common among distributors.

There was an endless stream of new fund offers (NFOs) and distributors were basically engaged in getting money into NFOs, and then out in time for the next NFO. In fact, when one examines the changes from that time carefully, Sebi’s changing of NFO-related rules and policies have played as much of a role in what has happened since.

Going beyond the obvious for-or-against entry load argument here, there is something more fundamentally wrong in framing the state of the fund industry in terms of the entry load issue.

Doing so defines the problem as one of distribution alone. You are basically saying that everything else is fine, it’s just that no one has enough incentive to sell funds. However, nothing could be further from the truth.