Mutual Funds
Online mutual fund trading increases cost, say distributors

Industry experts say that demat accounts increase the cost for mutual fund investors and will not help in penetration of funds

Stock market regulator Securities and Exchange Board of India's (SEBI) recent plans to introduce mandatory demat accounts for mutual fund investors has again brought forth the issue of cost of investing in mutual funds. The regulator in August 2009 had abolished entry loads on mutual funds to protect retail investors and to bring down the cost of investing.

SEBI had launched the online platform on the National Stock Exchange (NSE) and the Bombay Stock Exchange to penetrate mutual fund products through 1,500 towns and cities through over 200,000 stock exchange terminals.

The NSE started its online trading platform for MFs on 30 November 2009 and the BSE launched its BSE StAR MF platform on 4 December 2009. However, the limited mutual fund knowledge of stock brokers and high costs have not attracted investors towards these platforms. 

"Under this regime, the broker will still get 0.25% for a 'buy' or 'sale' transaction.

The mutual fund investor used to pay 2% to 6% for buying the same mutual fund prior to the SEBI ruling of 1 August 2009. So, this is not bad-it is cheaper. There is still room to pay an Independent Financial Advisor (IFA) up to 1% for all his efforts and advice. And by paying two separate charges-a fee for buying or selling on the exchange and a fee for the advice, the investor gets to know exactly what he is paying for, how much he is paying, and whether he is getting value for money for those fees paid. Each market participant-the fund manager, the broker, the advisor-must be good at what he does and get paid for it from a satisfied client," said Ajit Dayal, director, Quantum Mutual Fund.

"If a one-time investor in a mutual fund wants to invest Rs5,000, he has to spend Rs1,000 (20%) of his investment value for demat account opening and other charges, after that also he has to pay yearly charges. If the market is not able to generate returns he will lose 50% of investment in charges only.

If he wants to sell he has to approach the brokers. Today most of the retail investors in stocks lost their money heavily due to misinformation and wrong recommendation by the brokers. In that case investors are not going to benefit," said Vasanthi Krishnamurthy, a CFP.

Currently 17 fund houses sell their units on NSE's NEAT MFSS while 18 do the same on BSE's StAR MF platform. The industry has also seen a slew of exchange traded funds (ETFs) being launched on the exchanges.

Yesterday Moneylife carried an article which voiced strong objections from industry experts regarding SEBI's plans of boosting mutual fund volumes on stock exchanges by allegedly forcing a mandatory demat account for all mutual fund investors. (Read here: ( http://moneylife.in/article/8/6032.html)

Equity funds have seen an exodus of 2.87 lakh investor accounts between November 2009 and May 2010 when the mutual fund industry witnessed the launch of 10 new equity funds in the same period. The regulator has introduced a slew of regulations in the past one year including a crackdown on upfront commissions doled out to distributors.

"The focus must be on getting the products right and on getting each of the financial participants to work in the interest of the investors. Once you have this "pilot" in place-of an orderly and transparent system-then it makes sense to seek penetration. Why give the poor investor in Tier-II and Tier-III towns the terrible products that exist today? Clean up the mess, then offer them the safer products," added Mr Dayal.

"It is true that making investors hold their investments in demat form is a compulsion. In the case of mutual funds, the statements of account are not certificates-hence there is no need to save them from fire or flood; there is no fear of misplacing them (as they are already electronically handled by the registrar); one just needs the folio number," said Alok Khanna, a Kanpur-based financial planner.

"I have not seen any other industry/industries having so much micro-management by the regulator. On one side the government talks of its citizens being empowered and self-sufficient. On the other side it allows such self-defeating regulations to play havoc," said an IFA, preferring anonymity.
 

User

COMMENTS

dhara

7 years ago

ON MF

ashish

7 years ago

I think Sebi & it's chief take big chunk of money from BSE & NSE Because it's all decision more beneficial to BSE & NSE rather then Customer.

Roopsingh

7 years ago

The cost of trading through Demat is comprised of charges as listed below-
1-demat opening charge(min 500 Rs)
2-demat annual maintanance charge(min250 rs)
3-demat transfer charges-15 rs per security per transaction (minimum)
4-inter depositery benificiary charges( a new way of pick pocketing)
5-demat closing charges-few broking houses use this
6-short delivery charges which can be levied in case of Mf units also if punching is wrong /but it is never levied in present model
7-brokerage on sell and purchase which is normally 50 paisa(.5%) per sell and .5% per buy-with STT and other charges it is .75% or 1.5% in a trade cycle-which is more then AMC charges-
AMC's send printed statements and many other services which are more costly-but AMC's put no extra charge for a 1lac or 1k investor-

Now with all these charges how a retail investor will come forward to invest in MF is a BIG BIG question mark-may be SEBI has some plans to do some CHARITY for MF investors -then it can wipe off all these charges-
but i doubt Brokers and Deposietries will ever do this loss making business

NIPUL SHAH

7 years ago

GOVT. IS NOT IN FAVOUR OF INVESTMENT PSYCHOLOGY OF INDIAN PEOPLE. GOVT. WANT PEOPLE SHOULD SPEND AND LIVE HAPPILY TODAY DO NOT WORRY OF RETIREMENT. THEY WANT MORE MONEY SUPPLY INTO THE ECONOMY AND STOP SAVING, IT IS ALL DONE BY MNCS SELLING PRODUCTS IN INDIA. THEY DON'T WANT TO BOOST MF SELLING BUT THEY WANTED TO REDUCE AND PROMOTE SELLING BY BANKS SPECIALLY HDFC BANK. THERE IS ABSOLUTELY NO ROLE ON SIDE OF AMFI. THEY HAVE INCREASE IFA'S RENEWAL FEES OF ARN CODE WHICH WAS 500 AND NOW IT IS 2500. THEY WANTED EARN BUT WE SHOULD NOT EARN. THEY DON'T KNOW THE INVESTMENT PSYCHOLOGY OF INDIAN PEOPLE. I THINK REGULATOR HAS NO KNOWLEDGE OF THE INDIAN TRANSPORT SYSTEM WHAT THE COST OF TAXI AND RIKSHAW FARE FOR GOING ONE PLACE TO ANOTHER. REGULATOR SHOULD REDUCED THEIR SALARY TO 50%. AS THERE IS NOW NOTHING TO REGULATE. NO COMMISSION ON MF JUST SELL BECAUSE U WANTED TO SELL, THEY FORM NISM TO MAKE MONEY. WHY SEBI, IRDA, NISM, AMFI SO MANY REGULATOR. ONLY SEBI IS ENOUGH.

Chandrakant PAREKH

7 years ago

MY DATABASE TELLS ME THAT NEARLY 41.06% OF MY INVESTORS DON'T HAVE ANY DEMAT ACCOUNT. THESE SMALL INVESTORS HAVE AVERAGE AUM OF RS.1,02,500/-, THE AVERAGE AGE OF THE ASSESTS BEING 3.56 YEARS.
IF SEBI IS ADAMANT ON INSISTING OPENING OF DEMAT ACCOUNT FOR MUTUAL FUND INVESTORS, I WILL BE DEFINITELY LOOSING THESE INVESTORS.

MIPs become attractive for distributors due to upfront commissions

Distributors are keen to push MIPs due to upfront commissions offered by fund houses and the investor’s appetite for regular income

After market watchdog Securities and Exchange Board of India (SEBI) cracked down on upfront commissions, mutual funds (MFs) have started pushing monthly income plans (MIPs). Income funds recorded a huge Rs1.77 lakh crore of inflows in the month of April 2010 while equity schemes saw an outflow of Rs1,333 crore.

MIPs guarantee a regular flow of monthly income with minimal exposure towards equity. These schemes carry 1% exit load if redeemed before one year. These funds have 70%-90% exposure towards debt and 10%-30% in equity.  

According to sources, fund houses are offering 1%-1.5% upfront commission under MIPs.

"There is an appetite for it. Since the equity markets have turned choppy there was a need for regular income products. There is a demand for such funds. So there is a pull factor. Commission is not an only factor. Even ELSS schemes offered as high as 2.50% commission but if you see the sale of ELSS schemes of all MFs it won't be more than Rs150 crore," said a top official from a leading fund house.

Fund houses were offering 2%-4% upfront commission under equity-linked saving schemes (ELSS). ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses were passing on the commission in advance.

Earlier, equity schemes offered 2.25% upfront commission and 0.25% was deducted as service tax.

Sources indicate that distributors are not offering any pass-backs to investors under MIPs. The reasoning is that there is no upfront commission granted now.  

"Many distributors have sold MIPs from the last six to eight months very aggressively. Investors sometime compare MIPs to post office schemes but the returns can sometime be negative," said a Mumbai-based financial advisor.

The regulator had banned entry loads in August 2009. But fund houses had the leeway to offer commission from their own profit & loss accounts. SEBI in its circular dated 15 March 2010 had mandated fund houses not to deduct commissions from fund expenses. MIPs are currently allowed to charge a maximum of 2.5% as annual recurring expenses. AMCs were paying upfront commissions which included trail of either one to three years or after negotiating the terms with the distributor.

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COMMENTS

A F Lodha

7 years ago

why moneylife is after mutual fund advisor. you are creating bad picture of mutual fund advisor everytime.
you journalist are worse than advisor.you all jurnalist promote and give good recommendation whre you get advertisment income.

madhavi mangoli

7 years ago

which are the MIP's offering commission of 1 to 1.5% let me know so then i can also try to sell the same as i am an AMFI certified agent

SEBI’s effort to use banks to popularise online platforms unlikely to work

SEBI plans to enlist banks to help boost sales of mutual fund schemes, especially the schemes of mutual funds sponsored by banks. However, this move may not work

The much-hyped online mutual fund platforms on the Bombay Stock Exchange and the National Stock Exchange have mostly turned out to be a no-show. Now, the Securities and Exchange Board of India (SEBI) is making another attempt at boosting the flagging sales of mutual funds by this route. It is trying to rope in banks to give a fillip to the volumes on the online platforms. But this may not work due to a rule by the Reserve Bank of India.

As reported by Moneylife yesterday, the market watchdog has called a high-level meeting with bank-sponsored MFs and their respective retail product heads of the banks. The meeting is expected to be attended by the retail product heads of banks like IDBI Bank, HSBC Bank, Kotak Mahindra Bank, ICICI Bank, HDFC Bank and Axis Bank which also have asset management companies which may be represented by their CEOs. At the meeting, SEBI is likely to pressure banks into selling mutual fund products by a variety of means, including using the exchange platform. All these groups have their own large stock-broking firms.

But the current Reserve Bank of India (RBI) guidelines do not allow banks to set up broker terminals inside their premises. This was confirmed by a source from ICICI Bank. Most importantly, SEBI has no jurisdiction in the banking space and it is unlikely that banks will heed its call without the go-ahead from the regulator, RBI. Therefore, SEBI's attempts at having banks push fund sales through the broker terminal route may turn out to be infructuous.

The SEBI move makes sense on paper. Banks have the widest and deepest distribution network of financial products and if any segment can ensure large nationwide distribution it is the banks. Speaking about the development, a spokesperson from the Indian Banks' Association (IBA) said, "Many banks already have the systems and distribution platforms in place. It will be another business opportunity for the bank. If they find it worthwhile they will do it." Another senior official from IBA said, "As banks have a wider reach SEBI might be planning to use that channel to increase the turnover. Banks already have a system of cross-selling of financial products." But having a network is one thing. Making it work for a particular product is another matter.

By dialling banks' helpline, the market regulator is now signalling that it is ready to explore every avenue to push fund sales after net inflows into equity funds started falling from August 2009 when as part of a series of regulatory changes SEBI banned entry load and upfront commissions. This effectively eliminated the well-entrenched incentive-based distribution system of selling mutual funds. With commissions eradicated, mutual funds have found distributors deserting their products in favour of better revenue-yielding products like Unit-linked Insurance Plans (ULIPs).

When fund sales flagged, SEBI probably felt that it needed to take innovative initiatives to push mutual fund sales. One of its brainwaves was offering a system of buying and selling mutual funds through broker terminals. This resulted in the creation of the Bombay Stock Exchange's (BSE) StAR MF platform and National Stock Exchange's (NSE) NEAT Mutual Fund Service System (MFSS) late last year. This was again a logical move because stockbrokers have a wide network. But there is a fundamental flaw in the idea of getting stockbrokers to sell mutual funds. Brokers make money by getting customers to trade frequently and have little interest in selling mutual funds, the sales of which do not fetch large volumes. Not surprisingly, both platforms have struggled to make any significant inroads, as Moneylife had previously reported. (Read here: http://www.moneylife.in/article/8/3193.html).

Now SEBI has come out with one more trick by getting banks to push mutual fund products especially those of funds belonging to the same group. If the stockbroker network for banks does not work, SEBI will have to get national distributors to try other means to sell funds.

 

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COMMENTS

jignesh n vyas

7 years ago

Sebi is totely faild to incress MF equity investment. This rules demage Small investor. MF is push product. IFA are punished for bluander big disturbutior fo miss salling. Sebi reitroduce up front commision and after see inflow of applacation. jignesh.

Dillip kumar swain

7 years ago

RBI SHOULD BAN ALL BANKS NOT TO SELL M.F. & L.I.,BECAUSE UNNECCERY BANKS LOOTING INNOCENT CUSTOMERS & EARNIG THE REVENUE BY SELLING THIRD PARTY PRODUCT.BANK FORGET HIS OWN JOB.BECAUSE FOREIGN TRIPS NOT AVAILABLE BY MOBILISATION OF F.D.s OR LOANS.
NOW bankers are purely DASYU RATNAKR,no chance to be MAHARSI BALMIK.SEBI chairman is head of DASYU RATNAKARS. RBI SHOULD NOT ALLOW SEBI TO ENTER HIS ENTITY. MF OR LI IS SELF DRIVEN PRODUCT NOT A DEMAND DRIVEN.

Ranjan D Gupta

7 years ago

SEBI's attempt to increase sell through Bank related Mutual Funds will result in a poor show.I am surprised to understand that SEBI has no proper knowledge about the environment of investment in India.In India products like Insurance, Mutual Funds.Pension require to be sold, not being bought with enthusiasm.SEBI can draw a clue from the fact that after introduction of "no entry load" on direct investment by investors only 3-4% of the investments came from direct investors.Investors will run to the Bank to take a Fixed Deposit or lined up in a queue in Post office to purchase NSC or Kishan Vikas Patra but not come forward with the same aggresiveness to invest in Mutual Fund.
Banks can request their customers to open Demat account but not force them to do it.

sachin

7 years ago

rather than reiewing its own decision of august 2009.......

SEBI's action are trying to say everything and everyone else is wrong in mutual fund industry......and only SEBI people is right....

its high time SEBI reviews its own decisions regarding mutual funds rather than trying one trick after another....

MK

7 years ago

Time and again SEBI forgets the most important point that IN INDIA MUTUALS FUNDS ARE SOLD NOT BOUGHT. MF's are still a push product and not directly sought by the investing community. So the link will continue to be the so called MF Distributors/IFA's. Allow them to function and give them a level playing ground.

Hemant Beniwal

7 years ago

Do you think these trainees will be AMFI certified?

"ICICI Prudential, for instance, plans to hire 50 trainees to support its existing distribution network. “The bank has a strong branch network and we are trying to leverage on that. We are also looking to hire about 50 people as trainees to work in co-ordination with our existing distribution network,” said Mr Raghav Iyengar, National Head-Sales and Distribution, ICICI Prudential.

Some of the AMCs have also been hiring B-school graduates as interns for marketing their products. “The fund houses have been approaching us and are ready to send their interns to work with us to boost the sale of mutual funds,” said the head of an investment advisory services company in the city."

viresh

7 years ago

Mr. FM your NPS Lonch last year Please check volume Your NPS account and also check after NO Brokerage what mutual fund selling volume

Paul

7 years ago

What about the channel partners, there is no record of an transactions done by a channel partner on behalf of an AMC with an investor. Only their commission is blocked till date. But what are the efforts done by the channel partners to collect the application forms and details from investor. How much percentage has been sorted out till date. Any statistics???

rajesh

7 years ago

Mr.Finance Minister, wake up. See the damage caused by idiotic decisions of SEBI. If the government cannot provide employment to people, let it not ruin thier livelihood. We IFAs are been punished for the blunders committed by Big Distributors of mis-selling and churning. Dont Post Offcies pay upfront ? What is wrong with this method ? Has the Mutual Fund industry not grown substantially from 2001-2009 ?An IFA gives services from investment cheque to redemption cheque. To put back Mutual Fund Investments on track,please REINTRODUCE Upfont Commission and see the sales soaring.

V N Kulkarni

7 years ago

6 months back mr.bhave was worried about lack of advisory to investor.
Mr.bhave , can you explain what advisory a BOLT operator(90% of them are day trader/speculator) is giving while transacting mutual fund transaction over online platform.

jignesh n vyas

7 years ago

It is very bad time foy MF industry. If you not given up front commision to advisior . so very difficult to sell Mf. If you tick in form how much commision dicided between agent investor. This is right stap. No body given services to small sip and small applacation. Also on line for Mf advisor.

Manthan

7 years ago

This is another MOVE which clearly shows that SEBI has lost its mental power-and it is trying to heal stomache pain by a mental disorder pain killer-infact they are not ready to accept their series of failures of mental stability-these intelligent guys who have never dealt with a retail investor are proving them selves as big FOOLS-

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