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