The Sebi proposal is a diluted version of what the law should be but it is a small start. Not many investors come in directly — maybe less than 10 per cent. So there would be 90 per cent of investors who would still be ‘churned’ and dragged from fund A to B to C within one year, losing probably 10-15 per cent of their capital along the way. When markets are up, 30 per cent in a year, the loss due to that entry load gets hidden and disguised.

We cannot deny that there are distributors out there who do look after their clients and are focused on trying to build a portfolio of mutual funds that are best suited for their clients and these distributors deserve to get paid. The challenge is to educate investors that they should not speculate on which mutual fund will do well in six months (the justification for churning) but to stay invested for a longer period. And then to compensate the distributor via a balance reward structure which is transparent and fair to all.

One combination could be no entry load and, for those investors who wish to use distributors, a payment of a flat fee for their research and advice. When entry loads are removed — irrespective of whether the money comes in directly or via a distributor — the distributor is no longer focused on how he can make his client’s money jump from fund to fund to make money. His skills in understanding the needs of the client and building a portfolio of mutual funds will stand out, or be exposed.

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