The Mutual Fund industry runs on being able to sell funds to investors, and make money out of the initial commission and entry charges. This is something that most consumers do not know much about, and it is primarily SEBI and a few other parties who are trying their best to make sure that the Mutual Fund companies become much more rational in their charges and have a lot more discipline. This is a good initiative by SEBI in the interest of small shareholders who do not know too much about all these charges, and end up paying much more.
Market regulator SEBI is likely to prohibit close-ended MFs from charging up to 6% of the corpus as initial offer expenses, which is then amortised over a period of time. The move is aimed at bringing transparency in the manner in which MFs charge expenses to close-ended schemes. The proposal has implications for investor returns too. As per the proposal under consideration, close-ended funds would only be allowed to charge a certain entry load upfront, like in open-ended funds. When contacted, the Association of Mutual Funds in India (AMFI) chairman AP Kurian said, “We have received the proposal from SEBI and the industry is examining it in detail.”
In April 2006, Sebi had recast regulations relating to initial issue expenses and banned open-ended schemes from charging 6% initial issue expenses. However, the market regulator allowed close-ended schemes to continue with the practice. The open-ended schemes had to meet sales, marketing and other expenses through entry load, which is usually about 2.25%, and not initial issue expenses. Close-ended schemes were not allowed to levy an entry load. The difference in treatment of expenses between open and close-ended schemes has made the latter attractive for fund houses. Against a 2.25% entry load available in the case of open-ended schemes, an AMC can appropriate as much as 6% of the corpus raised by close-ended schemes for advertising and other related upfront expenses, which is not immediately reflected in NAV. As opposed to this, in the case of open-ended schemes, the 2.25% load starts for investors at that much lower NAV. This gives the erroneous impression to the investor that charges are lower in the case of close-ended schemes, which is not the case. Most close-ended funds actually charge 6%, which is the maximum limit available.