Proposal on Variable Entry Load

Proposal on Variable Entry Load 

Mutual funds are sold to investors through entities variously known as distributors / 

agents / brokers (referred to as ‘distributors’ hereafter). These distributors perform 

two functions. They act as agents of the Asset Management Companies (AMCs) in 

helping them sell their schemes. They also act as advisors to investors in helping 

the investors choose a scheme suited to their needs. 

The distributors are compensated for their services in two ways. A fixed charge is 

deducted from the investor’s subscription by the AMC (known as entry load) and is 

paid to the distributor. In equity schemes this is generally around 2.25% of the 

subscription. In addition, the AMC is free to pay the distributors amounts considered 

appropriate by them. 

The practice of deducting a certain percentage from the investors’ subscription has 

led to a criticism on one hand by the investors that they have no control over what 

they pay for the advice rendered to them. On the other hand, while, SEBI circular 

prohibits sharing of the distributor’s commission with the investors, complaints 

regarding such practices are voiced without any evidence being available. 

As a partial solution to this problem, SEBI mandated a zero entry load, in cases 

where investors apply directly for the schemes of mutual funds with effect from 

January 4, 2008. This has received a moderately good response with about 4%-5% 

mutual fund applications being made in this mode. 

However, investors making investments other than through the direct mode are still 

not able to exercise control over the commission paid to the distributor as the charge 

(load) is levied by the AMC and collected by the distributor from the AMC. 

Additionally, the entry load which is utilized towards meeting the distributor 

commission is linked to the size of the investment and has no correlation to the 

service provided by the distributor. 

We have received suggestions from various stakeholders that the commission paid 

to the distributor should be determined by the investor in consultation with the 

distributor depending on the service provided by the distributor i.e. to have a variable 

entry load structure. Variable load structure would also bring in greater transparency 

with regard to the commission paid to the distributor/agent/broker. 

The Advisory Committee of Mutual Funds deliberated on the issue and the following 

options emerged for consideration to operationalise the issue of implementing 

variable entry loads: 

a) 

Separate section in the application form: Within the application form itself, 

there could be a section where the investor could indicate the commission 

payable to the distributor which would be signed off jointly by the investor and 

the distributor. The AMC would then deduct the amount payable and pay the 

distributor. 

b) 

Separate cheque issued by the investor towards commission: In this 

mode the investor issues two cheques – one for his investment in the name 

of the scheme and the second one in the favour of distributor towards the 

commission agreed to be paid. 

In both the above options, the process for making the investment application remains the 

same except for the entry load being decided in terms of the agreement between the 

investor and the distributor. However, the mode of payment of the commission differs. In 

option (a) the investor would indicate the commission payable in the application form 

and the AMC would pay the commission payable to the distributor from the amount 

received from the investor, whereas in option (b) the investor would be directly paying 

the distributor. 

The downside of option (a) above could be that some complaints may come up between 

what the investor has indicated and what the distributor has agreed to. The probability 

of such a scenario would arise due to an oversight by either parties (investor and 

distributor) while filling up the form or due to any differences that may arise between 

them post the investment process. 

In option (b) there is an element of inconvenience to the investor who has to write 

separate cheques every time he invests through a distributor. Concerns of the 

distributors regarding non receipt of payment from the investor have been expressed by 

some quarters. 

As regards the payments made by AMCs to the distributors for the services rendered to 

the AMC, investors have raised issues regarding transparency. The question raised 

relates to varied commissions available on different schemes and by different AMCs. 

Due to such variations, the question arises as to whether the advice rendered is in the 

interest of the investor or whether it is influenced by the quantum of commissions. It 

has, therefore, been suggested that it should be mandatory for distributors to disclose 

the commission being paid to them for the different schemes which are being 

recommended to the investor. Transparency in this area will work to the benefit of the 

investors. 

Comments / suggestions are invited on the best option for implementing the variable 

entry load structure as well as the issue of mandatory disclosure of commissions. 

Comments/suggestions may be emailed to mfcomments@sebi.gov.in or sent to the 

address mentioned below before March 6, 2009 with the subject line indicating 

“Comments on Proposal on Variable Entry Load” 

Investment Management Department – DoF2, 

Securities and Exchange Board of India, 

SEBI Bhavan, Plot No. C-4A, G Block, 

Bandra Kurla Complex, Bandra (E), 

Mumbai – 400051 

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