Just like life and health insurance policies, a Finance Ministry committee has recommended the introduction of a facility of ‘free look period’ in mutual funds in order to curb mis-selling.
Earlier in November 2014, the Finance Ministry had constituted a nine-member committee headed by Sumit Bose, former Union Finance Secretary to review distribution incentives across financial products, rationalize commission structure and recommend measures to curb mis-selling.
Free-look period allows policyholders to terminate their insurance contract without paying any penalty. However, IRDA has allowed insurance companies to deduct expenses incurred on medical examination and stamp duty during the free look in period. Also, in case a policy commences, the insurer can deduct a certain amount which is proportionate to the risk premium for the period on cover.
In a recent online poll conducted by Cafemutual, nearly 75% of participants feel that introducing a free look period will not work in mutual funds. Also, majority of MF officials and distributors we spoke to are skeptical about this facility.
Aashish Somaiyaa, Managing Director and CEO, Motilal Oswal MF doubts the practicality of free look period in mutual funds. “Though investors will definitely like this proposal, they will find it difficult to exercise this facility. It is difficult to ascertain the performance of a mutual fund scheme in a short period of time.”
Dhirendra Kumar, CEO, Value Research is of the view that fund houses can do away with exit load for 15 days, if the proposal goes through. “Returning entire sum of money in mutual funds is practically not possible as there is a market risk. However, fund houses can provide a leeway to investors by doing away with exit load for a certain period.”
Bengaluru based financial advisor Srikanth Matrubhai says that investors can abuse the free look facility by exiting schemes if there is a market crash.
Also, if investors exit before the free look period, distributor’s commission will be clawed back.
However, a few experts have a different opinion. Lovaii Navlakhi of International Money Matters is of the view that free look period can help an investor who is mis-sold. “Though free look period may not work for mutual funds, investors who have been mis-sold can take advantage of this facility.”
Vikaas Sachdeva, CEO, Edelweiss MF who is a member of SEBI Mutual Fund Advisory Committee (MFAC) had earlier told Cafemutual that MFAC had recommended SEBI to bring the facility of ‘free look’ period in certain categories of schemes like liquid funds. “This might help investors get comfortable with mutual funds. Investors can be given an exit route in 15 days without charging any exit load if they have a bad experience. For the first time investors, the one year exit load can be applied after 15 days in equity funds,” he said.
Sachdeva further said, “People are not investing in mutual funds due to a variety of reasons. Paperwork and lack of basic information are the two main reasons. The third reason could be because of low comfort level. We can address this by introducing the ‘free look’ period.”
Currently, there is no data available in public domain which can tell us the number of investors who have exercised free look period in insurance. A few insurers and intermediaries said that not many policyholders have exercised this facility as it is difficult to understand a policy in 15 days. Typically, policyholders realize that they have been mis-sold after paying second or third premium, said experts.
