Life on the mutual fund (MF) street is never going to be the same again. After the market regulator, the Securities and Exchange Board of India (Sebi), allowed MFs to be traded on the stock exchanges, the number of Indian cities where you can buy and sell MFs have gone up to about 1,500, up from about 300.
Most MFs take time to expand into India’s hinterlands, partly because of the cost of setting up new branches, but mostly because they prefer to focus on the metros and Tier-I cities to get an easy access to corporate money.
The move to list funds comes barely three months after Sebi abolished entry loads on MF investments. Entry loads were charges, typically 2.25%, that MFs impose at the time of investing. These were eventually passed on to our agents as commissions. These changes won’t immediately impact you in terms of a gain or loss, but they will eventually change the way you buy and sell your MF.
Buying from exchanges
Although all MFs are not yet available at both the stock exchanges, it’s only a matter of time before that happens. Stockbrokers, too, are signing up. If you already have a demat account, you can simply pick up your phone and place an order with your broker to buy a scheme that you want to buy, just the way you would buy an equity share. If you don’t have a demat account, you could walk into any broker’s office with forms, Know Your Customer details like an address and signature proof, PAN card copies and invest.
Apart from buying equity and debt schemes, you’ll get a consolidated account statement across your equity and MF holdings. At present, liquid funds and systematic investment plans are not available on stock exchanges. But that’s only temporary. Remember that your broker needs to be certified by the Association of Mutual Funds of India (Amfi) and has to apply for the trading platform.
Every time your MF sends you account statements, it incurs a cost. The same goes for printing application forms. Now, since you can place an order to buy or redeem your units over the phone, you don’t need to fill any forms. MFs also need not send separate account statements, since your MF holdings, as per the new Sebi norms, will get reflected in the statement that your depository participant sends you.
Back of the envelope numbers show that if the top 15 MFs incur about 2,500 transactions each a day, the total cost incurred to print and dispatch them, assuming the cost of dispatch per statement is Rs15, would amount to about Rs14 crore. Now if only, say, 30% of these transactions shift to the stock exchange, MFs can save about Rs4.22 crore.
Take the case of new fund offer applications. Assuming 40% of the total transactions happen through new funds and accounting wastage of paper in filling up new forms (assume each investor wastes five forms before getting it right), the top 15 funds spend about Rs28.12 crore. Again, if, say, 30% of these transactions shift to the stock exchange, MFs can save about Rs8.44 crore.
That is not all. At present, MFs are mandated to send an account statement once a year even if the investor has not bought or sold a single unit. On this count, too, the top 15 MFs spend Rs264.16 crore annually. Again, if 30% of the transactions were to move to the exchanges, MFs gain Rs79.25 crore.
Says Amit Trivedi, CEO, Karmayog Knowledge Academy, a Mumbai-based MF training institute, “MFs can either plough the savings back into business or into investor education.”
The fund houses may not pass on the savings to you, just yet. The 2.5% charge that equity funds impose on you every year—from which they partly recover their marketing, selling and fund management costs—has little scope to drop further, experts say. Maju A. Nair, associate vice-president (distribution), Sharekhan Ltd, says: “Fund houses will prefer to plough back the savings into their businesses.” Here’s why.
With Sebi banning entry loads, distributors are now supposed to charge a separate fee from the investors. As a result, distributors’ income has taken a hit. In a hurry to compensate them and to ensue they keep pushing funds, many MFs have started paying them out of their own pockets. An industry that has historically suffered low profitability is expected to be further hit since the number of retail folios has not grown much.
The cost that you pay to your agent is expected to drop, though. First, your agent can no longer charge the maximum 2.25% that funds used to charge earlier. The price that your agent will charge you will now depend on the quality of service he can offer you. Second, stockbrokers may not charge you brokerage, at least in the first few months. Says Rakesh Goyal, head (distribution), Bonanza Portfolio Ltd, a Mumbai-based financial services company, “Since MFs pay us upfront as well as trail fees, there isn’t much merit in charging a brokerage fee.”
With misselling common in the MF industry, there’s a concern whether stockbrokers would be able to dole out the right advice on funds. “I doubt if stockbrokers are equipped to distribute MFs,” says Prithvi Haldea, managing director, Prime Database, a primary market monitor. Ashu Suyash, CEO, Fidelity India Asset Management Ltd, disagrees. “It’s not fair to generalize. We see stockbrokers offering MFs,” he says. Your neighbourhood distributor may vanish if he doesn’t pull up his socks and begin to do more than just collecting your signature. As stockbrokers are now allowed to sell MFs along with equities in dematerialized form at low costs, small-time distributors will have to offer you more value for your buck, such as quality advice, services like periodic statements, pick and drop of forms and cheques and regular meetings. The other option for them is to turn to financial planning and help investors channelize their income, plan their taxes and borrowings.
Money Matters says: Keep a close watch of what your mutual fund vendor charges you. Your costs should be coming down. And remember, the way you buy and sell funds will change soon. Keep reading Money Matters and we’ll keep you on top of events and changes as they occur. This industry is currently in transition.