Three years back, SEBI decided to ban entry loads on equity mutual funds to stop their gross mis-selling. What this move also ended up doing was it stopped its selling.
While it is true that no one has any monetary incentive to sell mutual funds anymore, the widespread perception that the problems in the mutual fund industry are attributable to this ban is stretching the argument too far. What is being portrayed is that all that is required is to bring back the entry load and, lo and behold, all problems would go away.
Mutual funds + Entry Load = Industry Problems solved. Hence, absence of Entry load is the reason for industry problems.
Well, that is a bit like the example that our market research professor used to give: what we referred to as the Soda research by a mistaken researcher who forgot the ‘control sample’.
It goes like this. A researcher undertook a few experiments to determine the causes of intoxication and as part of those, he came up with the following observations:
Whisky + Bubbly Soda = Intoxication
Vodka + Bubbly Soda = Intoxication
So he reached the conclusion that Bubbly Soda is the reason for intoxication!
The ban on entry loads might explain why no one is selling them, but just re-introducing it as a fix for the industry’s problems is losing the forest for the trees.
The truth is that the real problem is the education of the investor and a complete lack of a long-term orientation towards equity investing via mutual funds in individual investors. Fixing that does not have any magic button like increasing, decreasing or removing entry load.
All that entry load explains is why a businessman sells or does not sell mutual funds. It does not explain why no one is buying them or why they are buying the wrong things with the wrong orientation. You can keep tinkering with entry load all your life, but uneducated investors will continue selling at the bottom and buying at the peak, and with mis-selling they would do it for the wrong things.
The real reason for intoxication in the equity markets in not the entry load. It is a clear investing framework, and sticking to it over the long-term through multiple cycles. If you miss the alcohol of long-term orientation and educated behavior, whether you buy or sell something with or without entry load, it will not matter. You will still not get any high. Like the researcher, you can keep having that soda all your life hoping to get a high, but all it will lead to is stomach upsets.