MUTUAL FUNDS PREPARE FOR LIFE WITHOUT LOADS NEWS DISCRIPTION The capital market regulators decision to scrap

the entry fee on mutual funds from 1 August is set to alter the way the business is done in India For one, while the move by the Securities and Exchange Board of India (Sebi) was meant to benefit the investor, the change does not necessarily mean a free lunch. Distributors are devising ways to provide value-added services so that they can charge a fee for advising clients on financial goals instead of just hawking a product. An outcome to this could be that middlemen would focus only on high net worth

individuals and wealthy clients, leaving the smallest consumers with no option to access fund services. Entry loads, which are capped at 2.25%, are typically passed on to the distributor by the asset managers. This is about to change now, as Sebi says that distributor fees should be paid in a separate transaction and the entire money that is given for investing should go into the fund. It also tightened the rules for exit loads, which are 1-5% of the assets under management. This amount is typically used to fund marketing expenses, a part of which is distributor commissions. Now Sebi says that only up to 1% of exit fees can be used for marketing expenses. Indias fiercely competitive fund industry is set to become even tougher for fund managers as a ban on entry fees slows growth, adds to distribution costs, cuts profitability and delays the path to breakeven for newcomers. Its a move a move aimed at cutting costs for investors and to discourage aggressive selling. ANALYSIS Its not just something that affects newcomers. For existing players, it would mean taking a hit on revenues to pay agents at a time when sales have dropped and operating expenses have nearly

tripled to 113 basis points since 2004 due to higher marketing, distribution and administrative expenses. Domestic money managers typically charge about 2.25% as entry fee on equity mutual funds, their most profitable assets, and pay the entire amount as fees to distributors. By comparison, funds charge 3-5% in Singapore and about o1% in Europe and the United States. With investors in the top 20 cities accounting for 90% of industry assets, according to KPMG, funds are worried that lower payments will cut the incentive to distributors to expand into smaller markets in order to fuel growth. After a flood of new fund offers (NFOs) in the past two months, fund houses have shifted strategy and are now wooing investors to put in money in existing funds by declaring dividends. The move is prompted by a desire to collect money at the expense of investors for a few more daystill 31 July.

CONCLUSION The ban threatens the incomes of over 87,000 distributors, agents who sell funds for a fee, and bring more than 90% of the business to money managers. It is expected to be particularly hostile to small and new players who depend on agent networks.

The move will also make it harder for the more than 20 would-be entrants into the market, which is forecast by Boston Consulting Group (BCG) Distributors have already threatened to stop selling funds and said they might go to courts over the fee ban. While the next couple of years will be tough for fund houses and distributors adapting to the new compensation model, longer-term prospects remain bright REFRENCES 1. Mutual fund firms prepare for life without loads, Mint July 22,2009 2. Entry fee ban unsettles money managers, Mint July 28,2009 3. MFs rush to declare dividends, Mint July 29,2009

RINKI GROVER F0896 SEC-B