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.
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.
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.