While entry loads were abolished a decade back, investors who had enrolled for systematic investment plans (SIPs) prior to August 2009 continued to incur 2.25% cost on each installment. This was being paid to distributors.
Market regulator Securities and Exchange Board of India (SEBI) has now put an end to this practice. From April 15, 2019, SIPs registered prior to August 2009 can no longer deduct entry loads. While data on the number of SIPs that are still deducting this load is not readily available, rough industry estimates suggest that they are in the range of 2-4% of current SIP book.
SEBI has also clarified on some of the other provisions of its circular issued on October 22, 2018.
Definition of retail investors
In the earlier regime, all inflows (HNI, retail and institutional) from beyond 15 (now B30) were eligible for charging additional 30 basis point expense. From April 15, 2019, only inflows from individual investors who invest up to Rs 2 lakh per transaction (defined as retail investors) will be eligible for this incentive.
Upfronting of trail in SIPs
The upfronting of trail commission will be for SIPs of up to Rs 3,000 per month, per scheme, for an investor who is investing for the first time in mutual fund schemes.
Only the first SIP purchased by the investor will be eligible for up-fronting. If multiple SIPs are purchased on different dates, the SIP in respect of which the installment starts on the earliest date will be considered for upfronting. This commission is subject to claw back if the SIP is discontinued before the period for which commission is paid.
The upfront trail commission will be paid from AMC’s books. The commission will be charged to the scheme as ‘commissions’ and will also account for computing the total expense ratio (TER) differential between regular and direct plans in each scheme.
