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Business News/ Opinion / Online-views/  Cash investments in MFs could be tricky
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Cash investments in MFs could be tricky

In the absence of education on MFs, it is difficult to say whether it will have takers.

Hemant Mishra/MintPremium
Hemant Mishra/Mint

As part of the measures that the capital markets regulator, Securities and Exchange Board of India (Sebi), announced on 16 August, investors will now be able to invest in mutual funds (MFs) through cash, up to 20,000. For the 7.3 trillion Indian MF industry that has moved towards accounting for every rupee invested in the past few years, this one’s a bit of a surprise. Though it does not mean much for you, the urban mass affluent investor, the move is significant in making it easier for those in the unorganized urban and rural areas to invest.

Making inroads

Sebi chairman U.K. Sinha perhaps took a cue from his previous tenor as head of UTI Asset Management Co. Ltd, now the country’s fifth largest fund house with assets of 60,293 crore as per June 2012 data. Under Sinha’s leadership, UTI AMC inked deals with several local organizations across India. These organizations—or societies as some of them are popularly called—have members from the economically weaker sections of the society and daily wage workers, who don’t necessarily have bank accounts but still wish to set aside a small sum, say 100-200 every month towards investing. The society pools in all the money and gives a single cheque to UTI AMC that would then invest this money in one of its schemes, typically UTI Retirement Benefit Pension Fund.

Its tie-ups with organizations such as Basix, a Hyderabad-based livelihood promotion firm, Srei Sahaj, a subsidiary of Srei Infrastructure Finance Ltd, a firm that offers various government and public utility services to rural India and SEWA (Self Employed Women’s Association) Bank, Ahmedabad, have really helped. Otherwise, it would have been difficult for such investments to directly reach the fund houses or even to prescribe to the minimum investment criteria most MFs impose.

Allowing cash investments is not exactly the same thing, but Sinha, it seems, wants to increase the appeal of MFs. Consider some other measures he has announced, such as encouraging post offices, retired government and bank officials, teachers to become MF distributors, lowering the entry bar to make it easy for them to become distributors and incentivizing MFs to distribute their products in cities outside the top 15 cities.

Cash investments are aimed at those investors who would, typically, invest in micro systematic investment plans (SIPs). Micro SIP is a facility that allows you to invest up to 50,000 a year. Targeted at the weaker sections of society, micro SIPs do not require investors to submit their Permanent Account Number (PAN). Even cash investments do not require PAN card; other photo identity proofs such as the Aadhaar letter can be used.

Are fund houses equipped?

Some distributors feel that this is a good move. “This initiative will help bring new investors. To that extent, Sebi’s other move to allow new types of distributors in the business, such as teachers, retired bankers and so on, will also solicit cash investments in remote areas," says Manish Gadhvi, head (Mumbai operations), NJ India Invest Pvt. Ltd, one of India’s largest retail MF distributors. Gadhvi says that in addition to cash investments, the MF industry also needs more distributors.

Says Surajit Misra, national head (MFs), Bajaj Capital Ltd, “People in small towns usually invest in gold. They also invest in chit funds and plantation funds (collective investment schemes) that are not well-regulated. Allowing them to invest in MFs in cash will have a good impact."

Fund houses, however, aren’t too enthused. Since the industry is not used to accepting cash for at least 15 years now, this could be tricky. “I am not a fan of cash investments. Apart from our prevailing system of KYC (know-your-client) adherence, accepting only cheques and so on, there is a lot more accountability of the money that comes in; it also has a trail," says Puneet Chaddha, CEO, HSBC Asset Management Co. Ltd in an interview with Mint soon after Sebi announced the measures.

The key question is: how would fund houses accept cash—would investors be allowed to walk into the fund house’s branch and hand over cash? “Fund houses can’t work like banks. Depositors walk into bank branches with cash because banks are equipped to handle cash. We cannot handle customers walking into our offices with cash," says the head of marketing of a public sector bank-sponsored fund house, who did not want to be named as this is a regulatory issue and Sebi’s final circular is yet to come.

Some fund houses we spoke to feel that perhaps they will have to tie up with a bank. Investors can walk into a bank, deposit cash, get the pay-in slip (a slip that needs to be attested by the bank at the time cash is deposited) signed and stamped, attach this slip with the application form and then submit it to the fund house.

Years back, in 1990s, fund houses used to accept cash, in a similar way. The CEO of a small fund house, who was with the MF industry then, remembers that his fund house had started accepting cash but had to withdraw this option in just under two years, “somewhere in the late 1990s, because it proved to be operationally difficult". Industry sources say that in those days, fund houses, including JM Financial Asset Management Ltd, Birla Sun Life Asset Management Co. Ltd and the erstwhile Kothari Pioneer Asset Management Co. Ltd (later acquired by Franklin Templeton Asset Management (India) Ltd) used to accept cash investments. “We are not a bank capable of handling cash of that magnitude," he says.

Moreover, Sebi will need to clarify as to how fund houses will be allowed to redeem such investments. Will fund houses be asked to redeem such investments in cash? Or will they be allowed to issue cheques, instead? Note that these investors would not have bank accounts in the first place, so cash redemption appears to be the only answer.

Fund houses feel there is very little merit in making it mandatory for fund houses to accept cash. In fact, some foreign fund houses feel that though Sebi’s press release says “cash transaction in MFs to the extent of 20,000 will be allowed subject to compliance with the Prevention of Money Laundering Act, 2002 (PMLA) requirements…", it could actually mean that—or can be interpreted as—fund houses will (or should) get the right to reject cash investments. “Globally, movement of cash is considered to be a bad thing. To prevent tainted money from entering the system, a robust system—the way MFs accept only cheque payments—needs to be in place," says the head of marketing of a foreign fund house. Industry experts also say that foreign funds might be uncomfortable with accepting cash, though even many other fund houses we spoke to echoed concerns.

Should the poor invest in funds?

By allowing investors to invest in cash in MFs, Sebi has encouraged those who do not have a bank account or a PAN card. Good intentions aside, is Sebi targeting the right sort of people to invest in MFs? “To even think of the economically weaker sections of the society investing in MFs, we need a fair amount of education to be conducted for them. Many of these people invest in chit funds; they don’t even have bank accounts. First, they should open bank accounts. From there to MFs, it is a big step," says Veer Sardesai, a Pune-based financial planner. He adds that these investors mainly understand guaranteed returns. That MF returns are linked to market and they could lose money will be very hard for them to digest, says Sardesai.

Mumbai-based financial planner Amar Pandit feels penetration hasn’t yet been achieved even in the big cities. “Do the people in semi-urban and small towns and villages understand what an MF is? The fund industry must first address lack of financial literacy before they can approach potential investors such as these with their products. Also, what sort of products would be made available is another issue we must tackle. Would cash investments be allowed in risky schemes like sector funds?" asks Pandit.

Sebi—and therefore MFs—will need to strike a fine balance between more investors and financial literacy.

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Published: 26 Aug 2012, 10:06 PM IST
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