Mutual fund investors escape loads on reinvested units

Mutual fund investors in India recently got a reprieve from entry loads, on investments made directly and not through an intermediary. Now, Sebi has given them another piece of good news; a bright spot in an otherwise gloomy equity environment. MF investors will not have to suffer entry loads on bonus units and units given on dividend reinvested.

This was a rather dubious practice. An investor is charged an entry load for his initial investment. Bonus units are issued, just by splitting the NAV, and don’t offer any arbitrage advantage, as in equity shares which gain due to a bonus issue. The investor does not have a choice in the matter, either. Levying an entry load on such units is unfair, it creates a cascading effect. Say, on an initial investment of Rs 10, the NAV turns to Rs 100, the AMC has charged an initial load of 2%, which works out to Rs 0.2. It now issues a bonus splitting the NAV to Rs 50 each, now if it charges an entry load of even 1%, or is Rs 0.5. That’s a neat way of making money for the AMC without spending a paisa. The same logic applies for dividend reinvestment, dividend is being paid out from the existing corpus.

Sebi’s move is welcome. There will be no exit loads allowed on bonus and reinvestment schemes as. Many investors are not aware of these charges, because their focus is on the NAV and not what goes on behind the scenes, for computing the same. Expect bonus allotments to die a natural death though dividend reinvestment plans will perhaps continue. The new rule will apply to all new schemes and will be applicable to existing redemptions with effect from April 1, 2008.

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