The NSE and the BSE recently launched mutual fund trading platforms. However, after the initial euphoria, trading volumes on both the bourses are on a decline.

The National Stock Exchange's (NSE) new platform for mutual fund trading has still not gathered volumes; in fact, there has been a decline in volumes since the platform was launched on 30th November. According to data from the NSE's website, on 22nd December, the exchange recorded 11 subscription orders valued at Rs2,40,000 while for redemption, there was just a single order worth Rs4,877.77! Compare this with the opening day's transactions and one can see a huge drop in volumes. On 30th November, there were over 300 transactions, valued at around Rs78 lakh.

The Bombay Stock Exchange (BSE) launched its BSE StAR MF platform on 4th December. On 22nd December, BSE StAR MF recorded 23 subscription orders worth Rs6,25,500 while there were two redemption orders valued at around Rs52,82,565, taking total trades for the day to Rs59,15,565. On 4th December, BSE StAR MF recorded 251 orders worth Rs8.44 crore.

Out of the total 37 asset management companies (AMCs), only 10 AMCs have registered on the NSE-Mutual Fund Service System (MFSS) platform. On the other hand, BSE StAR MF has seven AMCs with a total of 103 schemes, and it has received confirmed participation from more than 20 MF houses. The Association of Mutual Funds in India (AMFI) is also planning to come up with its own MF trading platform by March 2010.

Describing the difference between the two rival platforms, an analyst said, “The BSE platform is mainly browser-based, providing access anywhere, while the NSE operates on the NEAT system, a dedicated point-to-point connectivity-based system.” Could this be the reason for lower transactions on the NSE’s platform?

MFSS is an online order collection system provided by the NSE to its eligible members for placing subscription or redemption orders on the MFSS, based on orders received from investors.

Market regulator Securities and Exchange Board of India (SEBI) banned entry load charges on MF units with effect from 1st August. With no income, many distributors almost stopped selling equity schemes of MF houses. The platform offered by bourses was seen as an alternative to investors to buy or sell units. However, looking at the fall in transactions, it is clear that investors have not yet adopted the new offering from the two bourses.

Like the NSE, the BSE has waived all charges till April 2010 to attract investors. After that, investors will have to pay the stipulated brokerage as well capital gains tax if they sell the units within 12 months. If the units are held for 12 months or less (short term), the same would be liable to tax at the rate of 15% plus cess.

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 or 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!

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.