Mutual Fund Distributors Can Charge Transaction Fee Selectively

19 November 2012

Following SEBI's direction mutual fund distributors can levy transaction charges on mutual funds based on fund category. After November 17th all distributors would have the option of choosing to levy transaction charge on select product categories and this will apply to funds of all mutual fund companies under their distributorship.

AMFI has categorized mutual fund schemes into 11 viz Liquid/ Money Market, Gilt, Debt, Infrastructure Debt Fund, ELSS, Other Equity, Balanced, Gold ETF, Other ETF, Overseas Fund of Funds, Domestic Fund of Funds.

Prior to this a distributor was either an opt-in distributor which means transaction charges were levied on all types of funds or an opt-out one who levied no transaction charges on any type of funds. Recently SEBI allowed them to opt-in for product categories they chose. With transaction charges returns on certain categories of funds like liquid funds would give negative returns.

Distributors who have opted-in can charge a one-time transaction fee of Rs 150 from new investors (those who have never invested in any mutual fund before) for investing Rs 10,000 or more in a particular mutual fund scheme. This fee is Rs 100 for existing investors. In case of SIP mode the fee is deducted from the 2nd to the 5th installments equally. The AMC or mutual fund company deducts it from your investment and pays the distributor. Your account statement is supposed to reflect your subscription amount, transaction fee and net investment.

SEBI banned entry load on mutual funds a few years back but distributors have been innovative in finding ways to extract money from investors. One of them is scaring investors to dump their existing 'poor' scheme they had recommended 2 years ago for a 'good' one. Or they might simply coax them to switch over to 'better' schemes only to return to suggest a 'still better' one later. Some distributors wrongly declare an existing investor as 'new investor'. Distributors often sell the wrong type of funds to the wrong customers if those are the ones earning them higher commissions.

You cannot be a smart investor and avoid being duped unless you are a sufficiently informed investor. As far as possible avoid investing through distributors. SEBI has ordered all mutual funds to launch 'direct plan' for every mutual fund scheme so investors can invest directly with the AMC without a distributor. Even if you invest through a distributor never take their advice for selecting funds. Read reliable stuff to help you do that job yourself or take the help of a good financial planner.

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