Another good news from SEBI

The Securities and Exchange Board of India (SEBI) on Wednesday prohibited mutual funds from charging and amortising initial issue expenses on closed-ended schemes.

Before the SEBI move, the mutual fund houses were allowed to amortise issue expenses of up to 6 per cent of the amount collected when a new scheme was launched.

So if a scheme raised Rs 1,000 crore it was allowed to recover up to Rs 60 crore as initial issue expenses from the investors investing in the scheme.

Initial issue expenses include expenses such as sales, marketing and advertising, printing and mailing, broker/agent’s commission, bank charges etc, that need to be incurred in order to get an investor to invest in a new scheme.

With this leeway of 6 per cent, some recent closed-ended fund launches, even paid commissions of as high as 5.5-5.75 per cent of the amount invested to the distributors.

The distributors, in turn, passed on part of this commission as kickback to the big investors.
A set back for distributors and investors who used to get kick-backs. But ultimatley this will help small investors by reducing cost of investing to a great extent.
Earlier AMCs came up with lot of close-ended NFOs to use this loop -hole. Now SEBI has acted wisely although a bit late.

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