04 May, 2013

Will the direct option introduced in Mutual Fund schemes live upto it’s promise?

SEBI has been a great votary of investor protection. There are many laws it had brought in specifically to help investors. Not all have been helpful for investors and some of them had unintended consequences for investors.

SEBI’s latest is the Direct option in Mutual fund schemes.  Let us understand what this is. Here, the expense ratio will be pegged at a lower level, as compared to the schemes distributed by intermediaries, as their commission can be saved.  This is akin to asking Godrej to sell a soap at their factory outlets at a lower price, though their retailers will be selling the same soap in their shops at a higher price! This would create a curious situation where the same product is available at two different prices and Godrej is in competition with it’s retailers! That would now happen with Mutual Fund houses and their distributors.

Will MFs benefit from this?   Savings for investors seems to be the motivation. But, will there be savings at all? If investors are motivated to invest in the direct mode, AMCs will have to augment their team for handling the volume.  The real retail crowd requires a lot of hand holding and these people will take up quite a bit of time and band-width, if they land up in the AMC’s points of presence. So truly, there may not really be any savings for the AMC. In fact, their costs may go up as their staffing is costlier, as compared to the staffing of distributors. It looks like SEBI feels that direct would entail lower costs. They may lean on the AMCs to artificially lower the expense ratios for the direct option. AMCs have to have another scheme called Direct apart from the regular one, for which they have to maintain a different NAV. All these increase their costing. This will affect the profitability of AMCs, where even in the current situation many AMCs are making losses.

Will clients benefit from this?  Now look at the clients. Are they going to benefit?  If clients want to bypass distributors and do things directly, they will have to fill out the forms and submit it at a POS.  Now, that seems easy. But, today that is easier said than done.  For instance, if a couple is investing in a MF scheme and the wife is the second applicant and she issues the cheque, the application will be rejected if the cheque does not bear her husband’s name! As a supporting document, a copy of the passbook will also have to be given, which shows both of them as account holders. So, that will entail a second visit.

Let’s take another example… suppose the wife invests in a scheme and the husband issues the cheque from his salary account, there is a third party declaration to be given. If his wife genuinely does not have a bank account or any other address proof, then the husband’s address proof and their marriage certificate would be required.

Assuming she has some address proof but does not have a bank account and gives her husband’s account no, at the time of cashing out she will have a problem as they will issue the cheque on her name though the account does not have her name. To take care of that, at the time of cashing out, she will have to give her old account details, including cheque and passbook and the new account details including cheque and passbook. Since old account is in the name of the husband, she will have to go to the branch and prove the relationship. If the old account is closed long back and one does not have any proof that they had that account, she had it. She will find it a herculean task to get her own money out.

So, it is not a painless process for the clients. In fact MF investments today have become quite cumbersome. They will have to go through the motions, bite their lip and keep reprocessing. In the process, lots of investors will give up, in between, in disgust. We are not done yet.  If the investments get done, there are invariably errors on the statement in lot many  cases. Now, further rounds will start to get that corrected.  This will become a full-time job rather than a diversion.

The investors would end up spending more time, effort & money in doing things themselves than they would save from the Direct mode, in terms of lower expenses. Only in case of those who invest in big chunks, like HNIs and corporates, Direct mode will be useful as they have the resources to invest directly, and handle any issues along the way. For all others, investing through their distributor would be the better choice.  There is lots of work to be done while doing MF investment today. As an investor, you need to decide if you want to do it or you want to get it done.  You cannot have the cake and eat it too, can you?

Article by Suresh Sadagopan   Published in Business Standard 
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