MF investors to gain from new regulations!

SEBI`s recent regulatory announcements on mutual funds are beneficial for investors. Here`s a small capsule on what has changed and how it will benefit investors.




The Indian mutual fund industry is at a very interesting phase. With growing popularity and booming assets under management, the mutual fund market is being closely watched by the regulators. Recently, SEBI come up with a few key regulatory changes that is expected to alter the way in which the mutual fund industry has been functioning so far. These changes are in conjunction with SEBI`s continuous effort towards safeguarding retail investors and plugging gaps in the regulatory framework for the mutual fund industry. A few of these changes may hurt fund houses but most investors are likely to be better off. Let`s take up these regulatory changes one by one and look at the impact.



(1) Dividends to be distributed from Realized Gains Only:



Now, no fund can distribute dividends unless the fund has booked profit from its underlying assets. Please note that this new rule is only applicable to those mutual fund investors who have opted for the `Dividend Plan`. Investors in Growth plan will not be affected by this regulatory change.



Let`s understand this with a simple example: If your fund`s NAV moves from Rs 20 to Rs 50 over certain period of time, the fund`s unrealized gain is Rs 30. This Rs 30 is usually transferred to Unit Premium Reserve. And as per the current practice, this reserve is used to distribute dividends to investors.



However, as per the new regulation, this reserve can`t be fully used to distribute dividends. The idea behind this new regulation is that only realized gains can be distributed as dividends. The unit premium reserves contain unrealized gains as well. Hence, now the fund has to sell its units / underlying shares to realize profits to become eligible for dividend distribution.



Many fund houses have been using higher dividend declaration as their selling pitch. Thanks to SEBI, the new rule will help curb such irrational claims by fund houses and hopefully stop investor`s getting lured by distributers into investing based on such claims. Though this means that investor will not receive hefty dividends as earlier, but one should also understand that investors are not losing out on anything. Instead, of receiving regular dividends, your money will stay with the fund and grow with your overall pool of investment in that fund.



In India, dividend declaration by mutual fund houses is widely hyped and often misunderstood. Unlike stock dividends, mutual fund dividends are just like paying out money from your own pocket. Post every dividend declaration, the NAV of your fund falls by the same amount. Hence, it`s doesn`t matter whether you opt for dividend plan or growth plan. Under dividend plan, you are receiving certain amount of your earned money at certain interval at the AMCs discretion. The same effect can be achieved under the growth plan by selling certain amount of units at certain intervals and what is more, at your own discretion.



(2) No Additional Fees to be charged from No-load Funds:



This new regulation is in continuation to SEBI`s earlier directive on entry load. In July 2009, SEBI had stipulated that there shall be no entry load for all mutual fund schemes. However, it was observed that the no-load funds were still charging an additional management fee of 25 basis points. Now, SEBI had clarified that AMCs shall not collect any additional management fees.



This is again good news for investors, as 100% of your investment will be put to work.



(3) NFO Period Reduced to 15 days:



In order to make the New Fund Offer (NFO) process efficient, SEBI has decided that the present limit of maximum period of 30 days in case of Open-ended funds and 45 days in case of close-ended funds shall be reduced to 15 days (except ELSS schemes). In addition, the Mutual Funds / AMCs shall make investment out of the NFO proceeds only on or after the closure of the NFO period.



This is a smart move by SEBI. Now, your money will not stay idle for one month or 45 days. Instead, your money will be invested immediately after 15 days (closure of NFO period) thus giving you and your fund an early chance to make investments in desired assets or asset classes.



(4) No Revenue Sharing by Fund-of-Fund Schemes:



Unlike normal mutual funds, fund-of-funds (FOF) invest their money in other mutual funds instead of stocks or bonds. In this process, FOF are used to receiving commission / brokerage from underlying mutual funds and such arrangements create conflict of interest. To curb this malpractice, SEBI has now asked FOFs to not receive such commission / brokerage or enter into revenue sharing agreement from / with underlying funds. Any commission received from the underlying fund shall be credited into the concerned FOF account.



This will help in improving the performance of FOFs as fund managers would not be bound by such agreements. Instead they will be able to take better decisions resulting in better returns for investors.