Beginning Monday, investors will be able to buy and redeem openended mutual fund (MF) schemes on the National Stock Exchange (NSE) through a stockbroker, the same as with equity.
Following a framework for MF transactions issued two weeks ago by market regulator Securities and Exchange Board of India, or Sebi, the country's largest stock exchange will launch a platform that will enable such trades. The Bombay Stock Exchange, Asia's oldest bourse, is expected to follow suit soon.
Units will also be available in dematerialized, or demat, form, but for those who do not have a demat account or do not wish to open one, the plat
form will enable physical delivery of units. At present, investors can only buy MFs either from a distributor or directly from mutual fund houses. A few online portals also sell these units.
The exchange platform will be a critical additional distribution channel for the Rs7.2 trillion Indian MF industry, which has had to rework its selling strategies after Sebi banned entry loads on MF transactions, effective 1 August. Entry loads are charges that MFs collected from investors at the time of investment and eventually used to pass on to agents as their commission.
Limited incentives doled out to distributors have resulted in negative sales for the industry for the past four months.
A.P. Kurian, chairman of the Association of Mutual Funds in India, or Amfi, an industry body, described the initiative as path-breaking (see interview).
However, this is not the first time MFs will be available on stock exchanges. Zurich Mutual Fund, later acquired by HDFC Mutual Fund, started offering five of its schemes-Equity Fund, Top 200 Fund, Capital Builder Fund, Prudence Fund and Tax Saver--on NSE beginning November 2000, making it the first MF in India to offer its open-ended schemes on an exchange. IDBI MF, later Principal MF, followed in May 2001 by offering its Equity, Growth, Balanced, Income and Tax Savings schemes. Both were withdrawn because of the poor response.
This time, say experts, the exchange, with its 200,000 terminals across 1,500 locations, will help expand the reach of MFs, allowing fund houses to concentrate on performance rather than sales functions.
"The emphasis will now shift to performance as it has become difficult to gather assets through marketing efforts," said Sandip Sabharwal, chief executive officer (CEO) of PMS (portfolio management services), Prabhudas Lilladher Ltd, who was a fund manager at leading mutual funds for at least a decade before moving to PMS last year.
Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, which manages Rs1.16 trillion, said it's a step in the right direction. "Having both offline and online options for investors makes it more efficient and definitely increases reach. In the long term, this will help all parties," he said.
Jaideep Bhattacharya, chief marketing officer, UTI Asset Management Co. Ltd, said: "The platform will take care of the back-end work of the sales staff and free up more time for transactions."
Currently, he pointed out, an agent in the Mumbai suburb of Ghatkopar must dispatch applications by 11.30am or noon so that the office in downtown Mumbai can process them and make sure that the investor gets the same day's NAV (net asset value). With the new system, an agent will be able to make transactions up to 2.59pm. The cut-off time for same-day NAV is 3pm for equity funds.
Ayes and nays Brokers, naturally, are thrilled at the new opportunities for revenue generation.
Raamdeo Agrawal, managing director, Motilal Oswal Financial Services Ltd, a large retail brokerage, called the move "exciting" and said it was common sense, but declined to estimate the growth of inflows.
"The point of sale for distribution of MF units gets pushed up by leaps and bounds so fast and easily," he said.
Motilal Oswal has 1,500 outlets, many of which retail MFs but did not have trading terminals to do so. "Now these branches can leverage on the strength of our terminals and get their clients' orders executed. At the end of the day, this will be a one-stop shop for MFs and stocks," Agrawal said.
However, the trading platform will likely not be an overnight game changer. "The platform will evolve over a period of time; it's not going to immediately reach at a level where you'd think substantial business is being generated," cautions Mayank Shah, CEO (retail business), Anagram Stockbroking Ltd.
"With this facility, brokers will also provide the value-added services such as helping the investors to choose funds, switching, dilute, exit and so on."
Agrawal also feels that small-ticket investors will benefit. "There are few places that a small retail investor--with an amount of Rs1-2 lakh to invest in MFs can go to. The adviser may not entertain him and at best provide `courier' service," he said. "Now that MFs will be traded on the stock exchange, the investor gets a little bit of stock trading and at the same time can get some investments done in MFs, under one roof."
In other words, a single demat account statement will be able to consolidate direct equity as well as MF holdings. Investors in MFs that already have demat accounts will now be eligible to make transactions but will need to open a broker's account first.
For the MF distributor community, which is already hurting from the ban on entry loads, the move is a setback.
Distributors that do not have NSE trading terminals will first need to become sub-brokers for an existing broker who has access to the MF NSE platform.
Distributors are concerned because they will need to share client details with the broker.
Also, a section of MF distributors--especially those that do not have trading terminals or are not sub-brokers or brokers--say that by allowing stockbrokers to sell MFs, their own incomes will take a hit.
Limited choice To begin with, only 30 schemes (equity- and debtoriented) of UTI Asset Management will be available, as other asset management companies (AMCs) are yet to sign up with NSE. Fund houses will have to enter into an agreement with the exchange/clearing corporation and notify the schemes that will be traded on this platform.
Top officials at Reliance Capital Asset Management, JM Financial Ltd and Mirae Asset Global Investments (India) Pvt.
Ltd said on condition of anonymity that they are yet to complete formalities and are assessing operational and business issues.
Many smaller AMCs are also still evaluating the prospects of getting into this channel.
Further, very few brokers, among them Anagram Stockbroking, Geojit BNP Paribas Financial Services Ltd and Bonanza Portfolio Ltd, will offer MFs to their clients through the NSE exchange platform.
Also, only stockbrokers that are registered with Amfi as mutual fund advisers and who have signed up with specific AMCs will be eligible to participate in the system. They will also not have to go through the Know Your Customer norms' verification again.
A fully-automated online order collection system, called NEAT-MFSS, will be provided to "participants" who can use their existing telecom network to connect to the system and enter requests for subscription and redemption of MF units.
Hiccups One key issues according to Rajesh Krishnamoorthy, CEO, Fundsupermart.com, an MF portal, is of brokers getting Amfi registration numbers. "At present, out of the 94,000 Amfi registered agents, only around 600 are shares and securities firms.
Many of these firms are already selling mutual funds through their distribution arms."
But brokers argue that this should not be a big issue as the Amfi registration only requires clearing an examination.
Also, with mis-selling rampant--coupled with the fact that many brokers tend to churn their client's portfolio--it remains to be seen how well the brokers advise their clients and whether they will encourage churning or genuine long-term investment.
Suresh Sadagopan of Ladder 7 Financial Advisories, a Mumbai-based financial adviser, said the move is a U-turn from an earlier Sebi move to switch to an advisory model.
"Brokers are going to charge fees at the time of buying as well as selling. Some brokers charge up to 80 basis points.
This will only increase churning. I am not sure how this will be cheaper than the existing model," he said.
Ranjit Dani of Think Consultants, a Nagpur-based financial advisory firm, welcomed the move but worried about the quality of advice, calling it "doubtful".
"Typically, the model of the broker is to churn customer's money. Brokers make 5-7 paise on a transaction, but they entice you with tips and make you trade so many times that they end up (charging) 5-7% in brokerage," he said, expressing concern that the move might lead genuine long-term investors to start behaving like traders.
There is no clarity on whether the NSE platform will allow systematic investment plans and systematic transfer plans.
National Securities Depository Ltd (NSDL) is looking at making changes to its system to be more relevant for mutual fund units. "At present, share prices are quoted in rupees-paise. For this, the NSDL system supports only up to three decimal points. But mutual funds declare asset values which go up to four decimals.
In some debt funds, missing out a decimal can result in huge difference in returns," said Krishnamoorthy of Fundsupermart, warning that unless the system was fixed, most funds with four decimals could be left out.
n.subramanian@livemint.com
Beginning Monday, investors will be able to buy and redeem openended mutual fund (MF) schemes on the National Stock Exchange (NSE) through a stockbroker, the same as with equity.
Following a framework for MF transactions issued two weeks ago by market regulator Securities and Exchange Board of India, or Sebi, the country's largest stock exchange will launch a platform that will enable such trades. The Bombay Stock Exchange, Asia's oldest bourse, is expected to follow suit soon.
Units will also be available in dematerialized, or demat, form, but for those who do not have a demat account or do not wish to open one, the plat
form will enable physical delivery of units. At present, investors can only buy MFs either from a distributor or directly from mutual fund houses. A few online portals also sell these units.
The exchange platform will be a critical additional distribution channel for the Rs7.2 trillion Indian MF industry, which has had to rework its selling strategies after Sebi banned entry loads on MF transactions, effective 1 August. Entry loads are charges that MFs collected from investors at the time of investment and eventually used to pass on to agents as their commission.
Limited incentives doled out to distributors have resulted in negative sales for the industry for the past four months.
A.P. Kurian, chairman of the Association of Mutual Funds in India, or Amfi, an industry body, described the initiative as path-breaking (see interview).
However, this is not the first time MFs will be available on stock exchanges. Zurich Mutual Fund, later acquired by HDFC Mutual Fund, started offering five of its schemes-Equity Fund, Top 200 Fund, Capital Builder Fund, Prudence Fund and Tax Saver--on NSE beginning November 2000, making it the first MF in India to offer its open-ended schemes on an exchange. IDBI MF, later Principal MF, followed in May 2001 by offering its Equity, Growth, Balanced, Income and Tax Savings schemes. Both were withdrawn because of the poor response.
This time, say experts, the exchange, with its 200,000 terminals across 1,500 locations, will help expand the reach of MFs, allowing fund houses to concentrate on performance rather than sales functions.
"The emphasis will now shift to performance as it has become difficult to gather assets through marketing efforts," said Sandip Sabharwal, chief executive officer (CEO) of PMS (portfolio management services), Prabhudas Lilladher Ltd, who was a fund manager at leading mutual funds for at least a decade before moving to PMS last year.
Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, which manages Rs1.16 trillion, said it's a step in the right direction. "Having both offline and online options for investors makes it more efficient and definitely increases reach. In the long term, this will help all parties," he said.
Jaideep Bhattacharya, chief marketing officer, UTI Asset Management Co. Ltd, said: "The platform will take care of the back-end work of the sales staff and free up more time for transactions."
Currently, he pointed out, an agent in the Mumbai suburb of Ghatkopar must dispatch applications by 11.30am or noon so that the office in downtown Mumbai can process them and make sure that the investor gets the same day's NAV (net asset value). With the new system, an agent will be able to make transactions up to 2.59pm. The cut-off time for same-day NAV is 3pm for equity funds.
Ayes and nays Brokers, naturally, are thrilled at the new opportunities for revenue generation.
Raamdeo Agrawal, managing director, Motilal Oswal Financial Services Ltd, a large retail brokerage, called the move "exciting" and said it was common sense, but declined to estimate the growth of inflows.
"The point of sale for distribution of MF units gets pushed up by leaps and bounds so fast and easily," he said.
Motilal Oswal has 1,500 outlets, many of which retail MFs but did not have trading terminals to do so. "Now these branches can leverage on the strength of our terminals and get their clients' orders executed. At the end of the day, this will be a one-stop shop for MFs and stocks," Agrawal said.
However, the trading platform will likely not be an overnight game changer. "The platform will evolve over a period of time; it's not going to immediately reach at a level where you'd think substantial business is being generated," cautions Mayank Shah, CEO (retail business), Anagram Stockbroking Ltd.
"With this facility, brokers will also provide the value-added services such as helping the investors to choose funds, switching, dilute, exit and so on."
Agrawal also feels that small-ticket investors will benefit. "There are few places that a small retail investor--with an amount of Rs1-2 lakh to invest in MFs can go to. The adviser may not entertain him and at best provide `courier' service," he said. "Now that MFs will be traded on the stock exchange, the investor gets a little bit of stock trading and at the same time can get some investments done in MFs, under one roof."
In other words, a single demat account statement will be able to consolidate direct equity as well as MF holdings. Investors in MFs that already have demat accounts will now be eligible to make transactions but will need to open a broker's account first.
For the MF distributor community, which is already hurting from the ban on entry loads, the move is a setback.
Distributors that do not have NSE trading terminals will first need to become sub-brokers for an existing broker who has access to the MF NSE platform.
Distributors are concerned because they will need to share client details with the broker.
Also, a section of MF distributors--especially those that do not have trading terminals or are not sub-brokers or brokers--say that by allowing stockbrokers to sell MFs, their own incomes will take a hit.
Limited choice To begin with, only 30 schemes (equity- and debtoriented) of UTI Asset Management will be available, as other asset management companies (AMCs) are yet to sign up with NSE. Fund houses will have to enter into an agreement with the exchange/clearing corporation and notify the schemes that will be traded on this platform.
Top officials at Reliance Capital Asset Management, JM Financial Ltd and Mirae Asset Global Investments (India) Pvt.
Ltd said on condition of anonymity that they are yet to complete formalities and are assessing operational and business issues.
Many smaller AMCs are also still evaluating the prospects of getting into this channel.
Further, very few brokers, among them Anagram Stockbroking, Geojit BNP Paribas Financial Services Ltd and Bonanza Portfolio Ltd, will offer MFs to their clients through the NSE exchange platform.
Also, only stockbrokers that are registered with Amfi as mutual fund advisers and who have signed up with specific AMCs will be eligible to participate in the system. They will also not have to go through the Know Your Customer norms' verification again.
A fully-automated online order collection system, called NEAT-MFSS, will be provided to "participants" who can use their existing telecom network to connect to the system and enter requests for subscription and redemption of MF units.
Hiccups One key issues according to Rajesh Krishnamoorthy, CEO, Fundsupermart.com, an MF portal, is of brokers getting Amfi registration numbers. "At present, out of the 94,000 Amfi registered agents, only around 600 are shares and securities firms.
Many of these firms are already selling mutual funds through their distribution arms."
But brokers argue that this should not be a big issue as the Amfi registration only requires clearing an examination.
Also, with mis-selling rampant--coupled with the fact that many brokers tend to churn their client's portfolio--it remains to be seen how well the brokers advise their clients and whether they will encourage churning or genuine long-term investment.
Suresh Sadagopan of Ladder 7 Financial Advisories, a Mumbai-based financial adviser, said the move is a U-turn from an earlier Sebi move to switch to an advisory model.
"Brokers are going to charge fees at the time of buying as well as selling. Some brokers charge up to 80 basis points.
This will only increase churning. I am not sure how this will be cheaper than the existing model," he said.
Ranjit Dani of Think Consultants, a Nagpur-based financial advisory firm, welcomed the move but worried about the quality of advice, calling it "doubtful".
"Typically, the model of the broker is to churn customer's money. Brokers make 5-7 paise on a transaction, but they entice you with tips and make you trade so many times that they end up (charging) 5-7% in brokerage," he said, expressing concern that the move might lead genuine long-term investors to start behaving like traders.
There is no clarity on whether the NSE platform will allow systematic investment plans and systematic transfer plans.
National Securities Depository Ltd (NSDL) is looking at making changes to its system to be more relevant for mutual fund units. "At present, share prices are quoted in rupees-paise. For this, the NSDL system supports only up to three decimal points. But mutual funds declare asset values which go up to four decimals.
In some debt funds, missing out a decimal can result in huge difference in returns," said Krishnamoorthy of Fundsupermart, warning that unless the system was fixed, most funds with four decimals could be left out.
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