MUTUAL FUND INVESTMENT RULES OVERHAULED

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INVESTING in a mutual fund (MF) is about to change forever. Investors will now have the freedom to directly negotiate on the fee they pay for the services of distributors or brokers at the time of purchasing MF schemes. They will get to invest the entire amount in MF units while separately paying the distributor for the services rendered.

Capital market regulator Sebi has said that the upfront commission shall be paid by the investor to distributors directly. It also said mutual funds cannot charge entry load for existing or new schemes.

At present, if an investor invests Rs 100 in a mutual fund, only Rs 97.75 would be invested, and the balance Rs 2.25 would go towards the distributor’s commission and marketing expenses of the fund house. With the new rule, the entire Rs 100 would be invested in the market, and the investor would pay a separate cheque to the distributor for the commission agreed upon.

In a move that would improve transparency, distributors will have to disclose the commission, trail or otherwise, received by them for different schemes/mutual funds they are distributing or advising the investors on. Distributors say the move could reduce the scramble for new fund offerings, and the focus will shift to existing schemes.

The regulator has introduced the concept of an anchor investor, whereby a company planning a public issue can allocate on a discretionary basis up to 30% of the qualified institutional buyer (QIB) portion of the issue to any one of the institutional investors. According to Sebi, the move will bring greater certainty to IPO transactions. At the same time, no person related to the promoter group or lead managers can apply as an anchor investor.

“This is a good move as it gives assurance of allocation against an assurance of participation and helps take the transaction through all kinds of markets,” said Chetan Savla, ED, Kotak Mahindra Capital.

At present, 50% of any book-built initial public offering is reserved for institutional buyers. The minimum application size for anchor investors would be Rs 10 crore, and the shares allotted to them will be subject to a lock-in period of 30 days.

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