Mutual fund-broker route may drive up investor costs

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

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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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