November 2:A quiet revolution is sweeping across the Indian fund industry. With funds now being aggressively sold than ever before, funds are fighting hard not to miss out on any selling point, if not score one. This is in sharp contrast to the earlier situation, when to mobilise Rs 100 crore, all a fund manager did was to float another fund.

With new players (mostly private and foreign) entering the domestic industry, fund managers are competing hard to attract a couple of crores in their investment kitty. Like other spheres of the economy, mutual funds are beginning to channelise resources for drawing investors to invest in their funds. Thus, the investor's pocket is now the new battle turf for the fund industry.

No wonder then, that the investor has emerged a king with superior options, a wide choice, convenience, higher service standards and low price. In their effort to differentiate themselves from peers, the funds are aggressively pricing their products with rapid fire changes in their entry and exit charges.

As set by the regulations, the asset management company (AMC) can incur a maximum initial expense of 6 per cent of aggregate amount raised. These initial launch costs include the brokerage and selling commission, advertisement and marketing expenses, registrar's fees and printing and dispatch expenses. Till a few years back, the AMCs were charging the maximum permissible expense on the fund.

Hence, as a rule, the start-up NAV used to be Rs 9.40 against the face value of Rs 10. Today, the AMC agrees not to charge these expenses if it does not perform. Moreover, in most cases, the AMCs partly or fully bear the initial issue costs. This has a substantial impact on returns to investors, specially on the short-medium term return.

So while your Rs 1000 investment in a no-initial-issue-cost fund growing at 15 per cent per annum will be Rs 1150 after a year, it will be Rs 1081 in a fund charging 6 per cent as initial issue expenses. In other words, the fund with a 6 per cent load will have to grow by 22.34 per cent to match the 15 per cent return by the former in the first year.

Perhaps, the cost of investment in mutual funds that is best known and most discussed is the "load". Load is well known, in part, because funds that chose not to impose them have made the term `no-load fund' well known. In open end funds, AMCs charge a sales load and/or a redemption load for providing distribution-related services relating to sale, redemption, promotion, advertising and marketing of units of the schemes. A sales or front-end load is charged when a scheme sells its units while redemption or back-end load is charged when it buys back the units. According to SEBI guidelines, the spread between sales and redemption price will not exceed the limit of 7 per cent.

Various funds charge between 0 to 7 per cent of the net asset value as load. Funds which do not charge anything are called no-load schemes. All the open end funds from JM Mutual are no load funds. Over the past year, the funds have been dabbling with these entry and exit charges. While Alliance '95, Kothari Pioneer, Magnum open end and Tata Equity Growth fund have brought down their load, Canganga has completely removed it for a few months.

ITC Top 200 and Reliance Vision have increased their load in the recent past. This could mean a increased distribution thrust by these funds. Though Reliance Vision has been in existence for over two years, there was hardly any marketing effort in the past.

Investing in a fund has a lot of uncertainty attached to it since there are no set paramters by which an investor can judge the preformance of the fund. Still, the best indicators that one could consider before investing in a fund are the past performance of the scheme and the performance of the other schemes in the fund family. However, this at best is also vague and as the fund industry keeps reminding: past performance is no guarantee to future returns.

But an investor should always be sure of the cost he is going to incur at a given time, especially when he has to make a choice between two or more funds - an investor should know what it would cost him to get into the fund, stay in the fund and get out of the fund. Surely, less expensive fund will generate better results, other things being equal.

The aggregate high cost mutual funds do not perform any better or worse than the low cost funds. With most of the funds using similar channels for distribution, the difference in service provided including investment advisory by the marketing agent is not much if any.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.