A welcome step to increase penetration – but many issues may need to be ironed out
“There are just too many changes in our industry – the pace is killing”, mumbled an industry colleague from the MF industry. Cannot fault him – for there have been order-of-magnitude changes in this industry and the latest one being the trading online through Stock Brokers. “This is a welcome step in the right direction, isn’t it?”, I interjected. “Time will tell”, he said enigmatically. He pointed out that there are too many changes which does not allow the dust to settle & things to get sorted out.
“Yeah, that’s there. But then, this will increase penetration in cities & towns across India – which is a very good thing for the industry…”, I ventured. He nodded and gave a listless smile.
This is one move that MF industry should really be happy about & thank SEBI for. They have not been able to take the products beyond 25-30 cities/ towns, till date. In one fell swoop, this will increase the penetration to 1000+ cities. That is great news for both the MF industry & the investors.
There are some nitty gritty issues & details, which need to be sorted out.
Brokerage – both ways? Stock broker typically charges on the buy & sell transaction. The typical brokerage for delivery is between 0.5% to under 1% for a retail investor. Now, if the same charges are applied for both buy and sell transaction, the cost will be between 1 - 2%. But this is just the transaction cost. After the entry loads have been removed, many MF distributors have not been charging anything and have been content with whatever the AMC offers upfront & the trail. The costs of doing the transaction with the stock broker will be higher, if the brokers do not decide to charge a lower rate for MF schemes as compared to Equity.
What about Advice? Any advice that may be offered will be priced over and above this. A stock broker is already very much engaged in his business. Unless a stockbroker takes Mutual Fund business seriously enough to invest time & effort, advice may again remain a neglected area for investors. Worse, advice may not be offered and the brokerage may be collected. The main accusation against MF distributors was that most were not giving advice & were getting paid for the transaction. That could mean a replay of what SEBI wanted to avoid, in the first place.
What about churning? Churning is a practice where the investment made is sold off & new investments are made with that money. This way a distributor / broker can keep getting brokerage on a regular basis. This was a major accusation as regards MF distributors. Now that could accelerate. In stocks, there is virtual official sanction to buy & sell in the short-term through the blessing that day trading has received. Day trading is speculation and is immensely profitable for the stock broker. Now, with everything being electronic, churning could well be a major problem. Exit loads in MFs are a deterrent. But many investors may not be even aware of Exit loads and stock brokers can take advantage of such investors. Protection on this front is necessary for this to work effectively. In fact, SEBI needs to do more to curb churning. Since Mutual Funds are excellent investment vehicles to participate in Equity markets for those with a lower risk appetite, it may be a good idea to have a lock-in of at least 3-6 months. Also, there should be metrics to penalize intermediaries, where the churn is beyond a threshold.
What about slowly weaning away clients to Stocks? Equity investments for stock brokers are profitable, as they are done with the same money, several times in a year. Mutual Fund investment, by it’s very nature, is for a longer investment horizon. A stock broker could convince clients to invest in stocks or PMS schemes instead, which are more lucrative for him than MF. This is a problem that MF industry has to contend with, as far as this new platform is concerned – as MF investments can well be weaned away to direct Equity.
There is a concern on increased volatility… That can happen too, as doing things electronically is a lot easier. It is far easier to punch a few keys than to fill forms and submit it to the R&T agent & wait for the transaction to happen. When markets go up or down, MF investments may also display an equity-like wave, going forward. That may increase the requirement for liquidity in schemes. Fund Managers may have to maintain more cash, depressing returns for all investors.
What about the direct route ? Direct route will exist. But for the multitudes who can only buy/ sell through a Stock Broker, this option is blocked. They will need to pay a brokerage. Hence the no-entry load regime will not benefit the vast majority who are expected to start transacting through stock brokers. Also, for those who want to have MF holding in demat form and do not want to pay brokerage, they will still have to buy directly with the AMCs and then demat it – a cumbersome process, which involves sending DD & the forms to the AMC and then dematting and getting it in their account.
The good old distributor is dead, then? Need not be. But the stock broker may have the advantage of directly being able to debit the client’s accounts, much like the banks, which a normal MF distributor cannot. Collecting two cheques – one for the investment & another for fee is onerous, to say the least. To avoid the hassles, the distributor may start partnering with the stock broker or become a sub-broker himself.
Penetration will increase; but will the situation be better for investors? Only time will tell. Currently, the situation is a bit hazy. There are quite a few issues that may have to be thought through, before implementing it. Investors still need to be on-guard, weigh the actions and proceed.
There could be many competing, electronic platforms ( apart from the stock broker, that could emerge. Space should be given for different distribution models to emerge, exist & thrive, instead of favouring one model or the other. That is what will give real power of choice to investors. We are looking forward to enlightened decisions from SEBI. Only time will tell.
Published in DNA Money Nov 20, 2009
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