Cost to investor under the new proposed route could reach up to eight times the expenses under current model
While SEBI’s move to allow brokers to deal in mutual fund products was meant to serve investor interests, it looks more likely that investors may end up shelling out more than they bargained for, if they were to buy or sell units through stock-exchange brokers or depository participants.
This is evident from the huge difference in transaction costs an investor would incur under the existing and new models. Under the present model, where investors approach distributors or apply to funds directly, only registrar and transfer agent (R&TA) costs are incurred by the investor. This boils down to per folio cost roughly amounting to Rs70 per annum. Whereas, industry sources reveal that under the depository/ stock-exchange trading-member model, costs will shoot up to between Rs540-Rs790 per folio per annum. In other words, the cost per folio would be eight times higher under the new model!
R&TAs are also more cost-effective when it comes to hosting large databases. While depositories today hold a mere 1.6 crore investor accounts, R&TAs hold 7.34 crore such accounts, and have a proven record of technical capability. Costs under the R&TA model are significantly lower as it plays a deeper role than that played by a depository or stock-exchange broker.
Industry experts indicate that brokers could charge between 0.25%-0.50% of the value of any buy and sell transaction involving mutual fund units. However, it is not yet clear how additional costs such as securities transaction tax and stamp duty would be levied. Brokers may even charge separately for investors who want advisory or support services.
All these costs would only increase the burden on the retail investor. Considering the already alarmingly low number of investors buying into mutual fund schemes, this extra baggage would only further their indifference to this segment.
– Sanket Dhanorkar