Mutual Funds
Investors shun demat route for funds and AMCs launch schemes that don’t need demat accounts

Even as SEBI’s move to get investors to buy mutual funds through the stock exchanges has failed to work, fund companies are floating fund-of-funds  to funnel money into ETFs—which are supposed to be bought only on the stock exchanges!

In late 2009, the Securities and Exchange Board of India (SEBI) hastily cobbled up the idea that mutual funds can be easily sold through stockbrokers, with fund units getting lodged in demat accounts. But the idea of getting investors to buy mutual funds through the broker-demat route has turned out to be a damp squib.

After one-and-a-half years, retail investors are not buying mutual funds from stock brokers in any meaningful numbers. What about the one kind of fund that must always be bought from stock brokers: exchange-traded funds (ETFs)? These are traded on the exchanges like stocks, hence the name. But fund companies are unable to sell enough of ETFs either. This is of course because hardly anybody buys funds from stockbrokers—exactly the opposite of SEBI's premise. So, even though there are 1.17 crore demat accounts, in a supreme irony, fund companies are now launching a vehicle that would funnel money into ETFs from those who don't have a demat account! The fund companies are arguing that this is being done to widen the market.

But widening what, really, when the ETFs themselves are not selling that well? Since the core objective of garnering money into ETFs itself is not working, the fund companies feel that there is a need to offer schemes to attract money that would then be put into ETFs. This makes nonsense of not only ETFs but SEBI's basic premise that mutual funds would be eagerly bought from stockbrokers.

Reliance was the first to offer the option of investing in ETFs without a demat account for its Gold Savings scheme. The idea was that those who were not able to invest in mutual funds since they did not have a demat account can now participate by investing in the markets through mutual funds. What Reliance had essentially done was converted an ETF into a mutual fund product. After Reliance, Kotak, Quantum, Religare and HDFC also launched a fund-of-fund (FoF) kind of scheme for gold.

Now, Motilal Oswal has also come out with a similar concept-Motilal Oswal MOSt Share NASDAQ 100 FoF. The only job of this FoF is to invest in units of Motilal Oswal MOSt Share NASDAQ 100 ETF. But why launch a scheme only to invest in another scheme which is merely tracking a foreign index? Because MOSt Share NASDAQ 100 ETF will be useless to those who don't have a demat account.

We will wait to see whether the convoluted idea of launching FoFs to funnel money into ETFs manages to get any traction. There is a fundamental contradiction here. Fund companies obviously think that India has a large number of eager investors, but only a small fraction of them have demat accounts. But a fact that the regulator, exchanges and market-infrastructure companies are unable to come to terms with is that India's investor population is not expanding. Those who do not even have a demat account don't even know about the risks of equity or are risk-averse enough not to dabble in equity shares. Most investors like them have preferred a safe investment, such as fixed deposits. The 40-odd funds operating in India have not been able to give achieve much of penetration.

In other words, one can't assume that there are large numbers of eager investors but they don't have a demat account. If they don't yet have a demat account, it means that they simply don't want to invest in markets. To sell FoFs only as a vehicle to funnel money from those who are currently non-investors in ETFs and that too into equity ETFs addresses a need that does not exist. At least, Reliance Gold ETF was a novel idea. It was the first FoF to invest in ETFs and the underlying product was gold, which Indians can relate to. But for those who don't even have a demat account, it would be a blind leap of faith to put money into NASDAQ 100, of all things. And if at all these people want to become investors they would rather prefer to start investing in domestic equity funds rather than plunging directly into foreign funds.

Fund companies and regulators don't see eye to eye on most things. In other things, they are on the same side: they are both focused on the destination, not the road.

Neither of them see that if people (investors) are not taking the current road to the destination (market), building another road to reach the same destination makes little sense.



javahar kp

5 years ago

Sir, The so called forums and groups are advocating and singing the same song composed by SEBI and produced by AMCs (sponsored) for a couple of years for mf online/d-mat mode, which is direction less in the present context.

anil kumar AMFI

5 years ago


Sudhakar Kulkarni

5 years ago

The main reason for ETF not getting desired response is the hurdles in getting D-mat account opened due KYC , SEBI/RBI should seriously think about one time KYC compliance for all the financial transactions.

Fuel price hike, duty cut to help contain inflation: Plan panel chief

According to deputy chairman of the Planning Commission Montek Singh Ahluwalia, the decision to cut duty, was a conscious decision to lose some revenue to moderate the impact (of the fuel price hike on the common man)

New Delhi: Defending the government’s decision to raise prices of petroleum products, the Plan panel today said it would suck money from the system and ease inflationary pressure in the long run, reports PTI.

“As we are raising the prices, the move will pull money away from the system. That would have a softening impact (on inflation),” Planning Commission deputy chairman Montek Singh Ahluwalia told reporters.

He further said, “I don’t agree with the view that if we had done nothing, inflation would have been lower. If we had done nothing, then the hidden inflation would have been eating away.”

The decision to cut duty, he said “was a conscious decision to lose some revenue to moderate the impact (of the fuel price hike on the common man)”.

The government had last week hiked diesel, kerosene and cooking gas prices by Rs3 per litre, Rs2 per litre and Rs50 per cylinder, respectively.

In addition, the government also reduced customs duty on petroleum products to 2.5% from 7.5%, which would result in an annual revenue loss of Rs49,000 crore.

Excise duty on diesel was also reduced from Rs4.60 per litre to Rs2 per litre.

During the remaining nine months of the fiscal, the Centre and states will lose around Rs24,000 crore and Rs11,000 crore, respectively, due to the duty cut on petroleum products.

The Plan panel chief said the rise in prices of fuel items would suck liquidity from the system, leading to a moderation in inflation numbers.

Headline inflation, as measured in terms of the wholesale price index, stood at 9.06% in May and experts said it will breach the double-digit mark by July on account of the fuel price rise.

Regarding the impact of the fuel price hike on the fiscal deficit, Mr Ahluwalia said: “They (government) have quantified some revenue losses. What happens to the fiscal deficit depends on many other things. I am sure the finance ministry is looking at that. And I think they are shortly going to submit to Parliament some sort of medium assessment on the fiscal position.”

He further said, “My personal view is that if we are looking ahead and if India faces a situation of rising energy prices, we should adjust ourselves to passing on the fuel prices, because if we have fail to do so, we will be weakening the economy.”

Asked his views about when the inflation numbers are likely to moderate, he refused to make any guess.

“The finance ministry has said that if the monsoon is normal and agricultural production is good, then price pressure will decrease. But I do not want to give a forecast,” the Plan panel chief said.

Mr Ahluwalia also called for a drastic reappraisal of the subsidy system in the country.

“We in the Planning Commission... it is our view that except for strictly targeted subsidies, I don’t think we can afford a system where we have subsidisation of fuel in any extensive way.

“The increase in prices has been a very modest increase.

It has not covered the full gap necessary. So if we have to implement the kind of energy policy that makes sense in the medium-term, we have to somehow or the other pass on the full burden unless oil prices fall,” he said.

Regarding the draft Food Security Bill, the Plan panel chief said: “The Department of Food and Civil Supplies is supposed to bring its proposals before the GoM... I know they are working on it.”

Asked if the Bill is likely to be implemented this fiscal, he refused to commit on a timeframe.

“As far as Food Security Act is concerned, the Act also depends on the new poverty numbers. So whether you pass it now or you pass it a little later, I don’t think the poverty list is going to be available for some time. So I don’t think the date of passage is crucial. What is important is so get a clear idea of what is it going to be,” he said.


RBI flip-flops on customer service report

RTI query reveals that despite inclusion of voluminous views in the report on customer service which is ready, the committee chairman continues to hold it back

The confusion and curiosity surrounding the Reserve Bank of India's (RBI) report on customer service headed by M Damodaran, continues. Based on information received under the Right to Information (RTI) Act filed by Mumbai-based activist Nagesh Kini, it is now clear that extensive work has gone into preparing the report especially by two committee members MS Sundararajan and S Gopalkrishnan, yet for reasons not stated, it remains buried.

It its response to four questions, the RBI rather blandly states repeatedly that the report is yet to be transmitted. The applicant seeks to know the dates on which each member and the chairman of the committee signed the report, the date when the report is to be submitted to the RBI, and if it has already been submitted, the date on which the report is expected to be put in the public domain.

It is over a year now that several people submitted their recommendations to the committee, but there is no sign of the report yet. Which is why Mr Kini evoked the RTI to find out the status on the report.

In its reply to the RTI query by Mr Kini, the RBI says that a time frame of four months from the date of the first meeting of the committee was set for submission of the report. This was extended by three months. Considering this, the report should have been out in public domain by now. It's been over 12 months since the first meeting was held on 15 June 2010, but the report has not yet been released.

Moneylife had reported that the report is ready, but the committee chairman M Damodaran is holding it back for reasons best known to him. Even the committee members did not seem to be aware about the details. (Read, "The curious case of the Damodaran Committee's report on customer services: Why is it still in limbo?")The committee was constituted in June last year to review the system of customer service and grievance redressal by banks. The committee was expected to undertake a strict review of the existing system of the Banking Ombudsman Scheme and customer service in banks, including the approach, attitude and fair treatment to customers in retail, small and pensioners segments.

The committee was also asked to evaluate the existing system of grievance redressal mechanism prevalent in banks, the structure and efficacy, and recommend measures for expeditious resolution of complaints.

Mr Kini's RTI query also sought to know the number of responses received by the committee from the public and NGOs. The RBI said that over a thousand responses were received. It also said that the number of personal submissions has not been tracked separately.

In a circular dated 16 June 2010, the RBI had invited suggestions to be submitted to the Damodaran committee on customer services by 15 July 2010. Mr Kini had also sent his recommendations.

The reply from the RBI also said that the committee conducted as many as 44 meetings, with different stakeholders such as industry associations, bank unions, and individuals among others, across the country. Interestingly, the chairman and committee members mostly attended the meetings that were conducted in Mumbai, while only two members did most of the hard work of visiting other cities. The meetings in other cities were attended mainly by three members of the committee, namely MS Sundararajan, and S Gopalkrishnan. Curiously, a large number of meetings (19 out of 44 meetings) were attended by other representatives of the RBI-other than the committee members-such as regional directors and banking ombudsman.

According to the RTI reply, the committee has also included comments of stakeholders based in the North-East, such as Sikkim, Guwahati and Mizoram. Mr Damodaran, the committee chairman, apart from attending the meetings in Mumbai, was present at only three of the meetings that were held outside Mumbai, in Delhi, Kochi and Tripura.

Experts point out that, this is the first time that any committee has sought recommendations from the people based in such remote and backward areas of the country, indicating that the report would have extensive information.

As per the RBI's reply, there were only two meetings held to discuss the inputs regarding usage of technology for customer care and protection. Interestingly, both of these were only attended by one committee member, MV Nair.

Speaking to Moneylife, Mr Kini said, "Our regulators appoint high-level committees and keep their reports in cold storage. This is not a good sign."


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