Exchanges are planning MF trading platforms

With distributors still trying to come to terms with the new regulations banning entry load in mutual fund schemes, fund houses are feeling the heat, as distributors have lost incentive to push their products. This has meant a 60% drop in mobilisation by mutual funds.

Amidst all this, one of the options being considered to sell mutual funds is to have independent trading platforms for mutual funds, led by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). This follows the permission given by the regulator Securities and Exchange Board of India to sell funds via the stockbroker-demat route as in stocks. According to sources within the industry, the first one would be set up by NSE and National Securities Depository Ltd (NSDL) while the second one may be set up by BSE, and two registrar and transfer agents (R&TAs), CAMS and Karvy.

Interestingly, the Association of Mutual Funds in India (AMFI), which represents the interests of the Indian mutual fund industry, is considering having a 30% stake in both the trading platforms. However, some members of AMFI have raised a valid concern on this proposed move, pointing to a potential conflict of interest in taking large stakes in two rival platforms. Especially so since some of the leading fund houses like Templeton and Fidelity are planning to introduce their own platforms, which would rival those of BSE and NSE. Again, these are prominent members of AMFI and a stake in BSE, NSE platforms would lead to another round of conflict of interest. “Also, if there are investor grievances with regard to a particular fund, what would be the spill-over effect on the whole platform and wouldn’t other members get dragged into the issue as members of the AMFI-promoted platform?,” asked the CEO of a large asset management company (AMC), requesting anonymity.

When some members raised all these issues in a meeting last week, it was apparent from AMFI’s half-hearted answers that the proposed move hadn’t been thought through in great detail. Also, AMFI had apparently assumed that it would have access to the entire database of R&TAs as a promoter of this platform. But this assumption seems too naïve. “While the AMFI office bearers are now rethinking the entire issue, the whole idea looks like a non-starter,” according to the CEO of another top AMC. 
— Debashis Basu & Sanket Dhanorkar

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    Investor Interest   Exclusive
    Online MF trading bane for distributors

    Allowing trading in mutual funds through exchanges will benefit brokers as they can charge commissions from both buyers and sellers; but it may put small distributors out of business

    Online trading of mutual fund (MF) units, which is expected to be implemented by January 2010, is likely to change the nature of MFs from long-term investments into short-term trading opportunities, just like equities. An online trading platform will mean less paperwork and investors can buy or sell MF units with just a mouse click or phone call. However, the new system is likely to benefit brokers more than investors, as they can charge brokerage from both buyers and sellers. It will also encourage brokers to entice investors to trade on a short-term basis. Moreover, investors who exit before the lock-in period will be charged an exit load which will benefit asset management companies (AMCs) and MF distributors.

    “SEBI wants to allow more than Rs5 lakh crore of assets (under management of MFs) to be traded on the NSE to increase its turnover,” said an Individual Financial Advisor (IFA) who did not wish to be named. “While SEBI has provided brokers a platform to increase MF investments, distributors have been left in the lurch because SEBI has banned the levy of entry load on MFs. Now, there is no incentive for small IFAs like us to sell MFs.”

    According to industry sources, many IFAs have started to exit the MF business as it is no longer profitable. Small distributors used to provide door-to-door service to investors but after the ban on entry load, the commissions received by them does not even cover their travelling expenses. The number of small IFAs has already declined drastically since the ban on entry load. These IFAs get only around Rs25 for an investment application worth of Rs 1 lakh, plus Rs50 if the investor stays invested for a period of at least one year. They are now getting together as a group to negotiate higher commissions from AMCs.

    According to industry sources, if an investor stays invested in a particular fund for more than a year, the brokers will get only 0.75% or 1% as commission; so he is more likely to encourage the investor to exit in a bull run and earn his commission both from the buy and sell side.

    “Mutual fund is still a product which requires a lot of concept-selling. Only 5%-6% of investors are investing in MFs; the rest are either not aware about MFs or have misconceptions in their mind,” said Hemant Rustogi of Wealthwise.

    Online trading will increase the reach of MFs to 1,500 towns and cities through over 200,000 stock exchange terminals, but it is certainly not good news for distributors who are struggling to find new ways to market MF products.
     —Ravi Samalad

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    Trading MFs through brokers may not be cost-effective for investors

    SEBI’s move to attract more retail investors in MFs can succeed only if it imposes measures to lower transaction costs

    In a move to increase the reach and availability of mutual funds (MFs), market regulator Securities & Exchange Board of India (SEBI) has proposed trading of mutual fund units through stock brokers. While this move, which SEBI plans to introduce by March 2010, may be well-intentioned, there are certain issues that need to be ironed out for it to be a hit among retail investors.

    Existing MF holders who do not have demat accounts need to open depository and brokerage accounts. Opening a brokerage account involves an initial deposit and various expenses such as annual maintenance charges and brokerage charges per transaction. According to industry sources, the commission structure will roughly be equal to that of a delivery-based brokerage, that is, 0.25% to 0.50% of the total transaction value.

    So, from investors’ point of view, the entry load, which SEBI abolished in August 2009, will be replaced by the cost of opening a demat account and payment of brokerage charges for each transaction.

    For investors holding physical MF units, the charges for dematerialisation would vary from broker to broker. “It could be a fixed charge of, say, Rs25 plus Rs3 per MF statement. However, the charges will have to be approved by SEBI and the stock exchanges,” said Chandrashekhar Layane, senior vice-president, FairWealth Securities.

    In addition, “a broker can charge 1% or 1.5% as management fees based on the total assets under management (AUM) of the client, subject to SEBI approval. For this to happen, further clarification is required from SEBI,” said Mr Layane.

    Earlier, MF distributors received commissions when investors bought MF units, but not when investors sold units. However, stockbrokers can charge brokerage from both buyers and sellers.

    Brokers may also levy advisory charges, although their knowledge and expertise in dealing with MFs is open to question. As brokers are more conversant with equity markets, they may not be inclined to focus on MF investors.

    Also, there is no clarity yet on the NAV (net asset value) at which MF units will be traded through stockbrokers. Currently, MF houses calculate the NAV of a scheme based on the previous day’s share prices. Moreover, trading MF units through the stock exchanges will expose them to a higher level of price volatility.

    According to SEBI , “Stock exchanges with their reach covering over 1,500 towns and cities and through over 200,000 stock exchange terminals can be used for facilitating transactions in MF schemes. The stock exchange mechanisms would also extend the present convenience available to secondary market investors to MF investors.”

    SEBI’s new move to increase retail participation in mutual funds will succeed only if it reduces the transaction cost by implementing norms that dissuade brokers from overcharging investors through a plethora of ‘hidden charges’.
     Ravi Samalad [email protected]


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