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The year gone by saw some moves that could widen the reach of mutual funds (MFs) and possibly help the way they are sold to retail investors. Here’s a quick look at what 2013 meant for MFs.

On to stock exchanges

Earlier in the year, the capital markets regulator, Securities and Exchange Board of India (Sebi), allowed MF distributors and independent financial advisers (IFAs) to come onto the stock exchange platform and buy or sell MFs in demat form directly on behalf of their clients. Though the stock exchange platform has been around since November 2009, at present, only Sebi-registered stock brokers are allowed to sell here. Up till now, if IFAs wanted to buy MFs on behalf of their clients, they could do so only after becoming sub-brokers of registered brokers, although the broker could only execute the transaction.

The Bombay Stock Exchange Ltd (BSE) is expected to launch the new version of this platform on 15 January. “More than 100 MF distributors have applied for membership. We are seeing a lot of interest from the distribution community," says V. Balasubramaniam, chief business officer, BSE Ltd. “The stock exchanges have created huge infrastructure connecting many districts across the country. While this enables convenience of transaction, it also enables holding such units in an electronic form," says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd.

However, a few wrinkles remain, which distributors and stock exchanges are working together to iron out.

First, distributors are concerned as to how the registrar and transfer agents (R&Ts) will account for their trail commissions. At present, when distributors sell MFs through the traditional mode (investors fill up form; they later get common account statements, or CAS), the R&Ts send distributors information on their trail commissions once a month. This information is sent transaction-wise, so it’s possible for distributors to check which transaction got them how much commission.

However, when brokers buy MFs, R&Ts send them commissions as per their demat account, in a somewhat consolidated way. “It’s very difficult for distributors to ascertain which transaction got them how much commission. This lack of classification makes it difficult for them to reconcile their books," says Balasubramaniam of BSE.

Second, at present the statement that your R&T sends you reflects only the units bought the traditional way; those bought on stock exchanges (in demat form) are not shown.

Being labelled

This change doesn’t seem very significant now, but is expected to gain traction eventually. Earlier this year, Sebi mandated that all MF schemes carry a product label which says what the fund is and what it will do. This is something like a label on your shirt that tells you what material it’s made of, some cleaning instructions, and so on, or a label on your wine bottle that tells you the name of the winery, the year it was made, the type of grapes used, and so on. As per Sebi rules, your MF’s product label will tell you the scheme’s objective, its objective in brief and its risk quotient. The label will also be colour coded. A blue mark on the label means it’s a low-risk scheme. A yellow mark indicates medium risk, while a brown mark means that it’s a high-risk scheme. At present, debt funds come with a blue mark, hybrid funds have a yellow mark and equity funds a brown one.

But not all are convinced that colour coding helps. “Product categorization should also be introduced appropriately for other financial products. At present, it appears that the risk is only associated with MF products, which isn’t the case," says Leo Puri, managing director, UTI Asset Management Co. Ltd. Puri, however, admits that the move “will help investors get a basic idea of the type of product they are investing in".

Others in the sector echo the thought that it is not fair to have colour coding only for MFs and not other instruments. Siddhartha Singh, chief executive officer, PineBridge Investments Asset Management Co. (India) Ltd, says, “The colour code is not required in the first place. It confuses more than serving the purpose. Do we have colour codes in fixed deposits of various banks or insurance policies of insurance firms? Then why here? By doing such things, we are giving the impression that there is something wrong with MFs."

Since product labelling of MFs isn’t even a year old, we are still to see its benefits. But a label that tells you the bare basics of a product upfront is a good reference point to begin your search for the right scheme.


Limit of investment under Rajiv Gandhi Equity Savings Scheme (RGESS) was hiked. Investors with a gross total income of Rs12 lakh can now invest instead of the earlier limit of Rs10 lakh.

Dividend distribution tax (DDT) for debt funds (other than liquid funds) went up to 25% (excluding surcharge and cess), from 12.5%. DDT paid by all types of debt funds (liquid funds and other debt MFs) to retail investors will be 25%.

A new cadre of distributors have been allowed to sell MF schemes. They can sell only diversified equity, fixed maturity plans and index schemes that have given returns better than their benchmark indices in each of the past three years.

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