Before the removal of entry load, the Securities and Exchange Board of India had put a discussion paper in the public domain inviting comments on certain proposals. Among the options, the regulator had suggested a variable entry load, agreed between investors and advisers, and the agreed commission will be mentioned on the form. The client will issue a single cheque, which will include this commission, and the mutual fund will pass back the commission to the intermediary. The second option was that the client would issue two separate cheques, one for commission and one for the investment.
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According to reports, at least 90% of the respondents favoured the first option, i.e a single cheque. The bigger concern for the distributor fraternity was the two cheque system and not the variable load. The argument was that it would be an operational nightmare for them, and it will become easier for investors to not pay any fee.
However, there is some good news for advisers. Single-cheque facility is back and it is an integral part of one of the operational reforms.
Mutual fund units can now be transacted through special windows created on the National Stock Exchange and the Bombay Stock Exchange. The take off has been slow as the system till end-December (stage I) was slightly inferior. In stage I, when a broker used to enter orders for the client, the units went directly to the investor’s account. If the broker waited till the clearance of the cheque, the applicable net asset value (NAV) used to be that after two-three days. And if he did not wait and entered orders on the same day, he took credit risk of the investor. Compare that with the physical application where the investor used to get the same day NAV without any risk to the adviser. However, this irritant has been removed now.
In stage II, the settlement system is changed. Now units will come to the broker’s pool account and once the funds are cleared, the broker can transfer units into the client’s account. Similarly the redemption amount will flow through the broker’s pool account. It will make switching easier.
Let’s discuss the changes this system has unleashed.
•Single cheque not only for one investment but for all investments, including commission: If an investor would want to put Rs 5 lakh in five different funds and agrees to a 0.5% front-end commission, the adviser can collect the cheque in the name of broker. The broker can deduct Rs2,500 as commission and put Rs99,500 each in five mutual funds.
•Single ECS mandate for multiple SIPs: If an investor would want to start a systematic investment plan (SIP) of Rs30,000 every month in three funds, he would just need to give a single electronic clearing service (ECS) mandate to the broker of Rs30,000. If the agreed charge is 1% then the broker can deduct Rs300 and invest Rs9,900 each in all three funds. It would also make switching SIP from one fund to other easier.
•Effortless switching across fund houses: In the physical system, switching funds across fund houses take three-seven working days. It creates the risk of return slippage because of being out of the market during switching. It is cumbersome to service as well. In the new system, it can be done on the same day if the broker would agree to fund the switch.
•Servicing of the remote customer: Physical system prevents investment advisers from servicing upcountry investors or investors from remote suburbs of metros due to higher cost and logistical difficulty. In the new system, once a client opens an account, servicing is very easy and transactions can be done over phone or email.
•Ease in investment administration: Changes in address, nominee, bank account, phone number, email address would become simple as it has to change only in the demat account. In the physical system, each and every asset management company needs to be informed.
•Easier to administer lending against investment: As it is easy to mark lien on the holdings in demat account compared with account statement regime, many advisers may be able to tie up with non-banking financial companies to offer borrowing facility to their client.
These are only a few advantages which I could think of. I am sure as time passes by, the industry will figure out many more advantages.
If the new platform is embraced in right earnest, it is bound to bring a major change in the investment advisory landscape of India. Till now, we have had a very polarized industry divided between stock brokers who generally cater to equity investors/traders and there are mutual fund distributors who sell mutual funds, fixed deposits and do not trade in equities. Advent of this stock exchange platform for mutual funds will blur this line and many full service houses will emerge.
Above all, this platform will make sure that advisers will find it profitable to service even smaller clients. This will go a long way towards penetration of mutual funds.
Rajan Mehta is executive director, Benchmark Asset Management Co. Pvt. Ltd.
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