For equally good food, which cafe would you pick—one that has good parking and is on the ground floor or another that has difficult parking and is two flights up a dark stairway? I find myself choosing the first over the other most times. I also find my selection process sensitive to costs of access such as parking fees. I tend to avoid places that will charge more than the usual Rs10 as parking.
Ease of entry and exit and low entry and exit costs are two attributes that any retail offering works hard to get right. Financial products are just the same. Unless buying, keeping, tracking, consolidating and selling are cheap and easy, retail products such as mutual funds will remain boutique, ones that are sold and not bought.
In this backdrop, look at what is causing the latest round of hand-wringing in the mutual fund industry. The capital market regulator has allowed mutual funds to list on stock exchanges, and on Monday, 30 UTI schemes were listed and began trading on the National Stock Exchange. Others would follow.
While the public statements of brokers, fund houses, banks and distributors are all politically correct, offline, the venom is vitriolic. Fears of funds turning into casinos, of brokers not willing to sign up, and an overall feeling of “this will not work” are plenty. This comes soon after one round of venting after the 1 August move over to no entry and exit charges in funds—also known as loads—which incidentally is being watched carefully by regulators across the world to see how it works, as it is a global first. The past six months have seen change, both in the plumbing of the mutual fund innards and in the way they intersect with the lives of investors.
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If we go beyond the noise, what’s happening is this: Mutual funds were envisaged to be a bus that retail investors could ride to get the benefit of fund management through a fraud-free route. However, the short-term nature of capitalism along with the valuation hunger—the larger the corpus of money a fund house manages, the larger will be its valuation in a stake sale or while listing—ensured that the institutional business got the maximum attention, innovation and service and the retail investor was given peripheral attention and even then it was the use of the new fund offer route to gather assets.
A crucial part of this was the distributor who had access to the retail investor—you and me—and was mostly happy to sell us garbage as long as he was paid his cut. Of course, the story is much worse in another part of the market, but let’s deal with just funds here in isolation.
But the Indian investor, like the voter, is no fool. There must be a reason that we still keep the bulk of our savings in low-yielding, sticky and tax-inefficient bank deposits. We’ve not had the confidence to step over to managed funds because we don’t trust the advice. And they are difficult to transact compared with direct equity.
Now view the regulatory changes in the light of this backdrop. By removing loads, the market regulator has removed the key cause of mis-selling of funds. Sellers, including relationship managers of banks, would tell you that a Rs10 NAV (net asset value) was cheaper than an older fund with a Rs50 NAV, hence you should buy the new one. Of course, the new one earned him more commission and, anyway, who was tracking his lie about the NAV?
Now there is one cost that you need to look at—the expense ratio that is capped at 2.5% a year today and likely to come down as we go along. Look at the stock market listing of funds as step two of the no-load move. And here the main participants driving the change are on firm ground; they saw this happen in the last decade when the stock markets went demat with online screen-based trading. Costs, transaction time and fraud have all come down exponentially.
Once the market and the actors in the drama have digested this new piece of change, the mutual fund world will look something like this: There will be large distribution houses, including banks, that will offer us a 20-50 basis points transaction fee for buying and selling mutual funds, just as we do stocks. One basis point is one-hundredth of a percentage point.
This will typically carry no view on what you should buy. If you want advice, you will have to pay for it, either through advisers attached to these large entities or through independent financial advisers and planners who will charge a fee, just like a doctor or lawyer or architect.
As we go along, the rules will come in that will deter advice that is motivated, tied to a particular company or in any other manner compromises your investment decision. While there is no perfect world, there is a world with no parking tickets, cafes that serve great food that are easy to enter, have toilets that work, and are not built like traps.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at expenseaccount@livemint.com.