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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