Funds to see long-term inflows as loads curbed

By Nishant Kumar

MUMBAI (Reuters) - The Indian market regulator's move to ban entry fees for investments into mutual funds will lead to a jump in long-term inflows as distributors adjust their business models to generate more volume and trail fees.

India's stock market regulator said on Thursday mutual funds can not levy any entry charges for investments but allowed distributors to claim a fee for their advise from investors. It also directed them to disclose commissions earned to clients.

"This will certainly help in bringing long-term quality assets to the mutual funds. It will help stop churning," said Chintamani Dagade, a senior research analyst with Morningstar.

More than half of the 1.2 trillion rupees equity assets of the funds industry was less than two years old at the end of March, data compiled by the Association of Mutual Funds in India show, as a result of frequent churning.

This is set to change as distributors, who get an upfront fee from about 2.5 percent entry load that equity funds charge, will now have no interest in making investors switch funds.

Instead, they stand to gain more in the form of trail fees or the money they get from fund houses on continuous basis, if investors kept the money invested longer.

While the changes will hurt distributors revenues in the short-term and limit fund firms ability to gather assets in new funds by paying large upfront commissions out of entry fee, it make investing cheaper and more transparent for investors.

A distributor "would be more interested to keep his trail alive," Abizer Diwanji, head of financial services at consultant KPMG said.