More power to brokers for your MF transactions

More power to brokers for your MF transactions

The capital markets regulator, Securities and Exchange Board of India (Sebi), on Tuesday gave its nod to a long-pending demand of brokers that transaction in mutual fund (MF) units on stock exchanges be done through a broker’s pool account. This means that if you buy or sell any MF unit, the transaction will not take place directly through your account, but would be routed to you through your broker’s account.

“It’s a path-breaking step that will address a major roadblock in the process of buying and selling MF units through exchanges. This will augment major flow of funds and increase the volumes in the near future," says Rajan Mehta, executive director, Benchmark Asset Management Co. Pvt. Ltd.

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Broker’s advantage

Earlier, to ensure that the units are allotted to the investor on the same day’s net asset value, the broker would first pay the MF out of his own pocket. The investor’s cheque would take about two days to get cleared. In this arrangement, the broker ran a risk. The investor’s cheque could bounce and he could easily redeem the units brought through the broker’s money into his own account directly. The broker had limited recourse.

In fact, experts claim that the MF platforms—Bombay Stock Exchange’s Star and National Stock Exchange’s Mutual Fund Service System—failed to take off mainly due to this risk. Of the total inflows that the 7.13 trillion Indian MF industry has been getting every month since December 2009, less than 1% of the inflows come from the exchanges.

“Most of the brokers were not keen on selling MFs as there was less commission to earn and also they faced administrative problems. Now, you will witness a substantial increase in volumes in the next two-three months," says Shiv Kumar Goel, founder director, Bonanza Portfolio Ltd, a brokerage house.

Investor’s advantage

Till now, if you had to invest in two funds, you had to sign two different cheques. Now, you can give a single cheque to your broker and tell him to invest the money in the funds of your choice. Moreover, the new system will enable investors to have a consolidated account statement not just across all MFs, but across their equity and MF holdings.

However, experts believe that more can be done. “It will be of great help if exchanges can work out cheaper and easy access to exchange platform for MF distributors will increase MF penetration," says Mehta. At present, a majority of MF businesses take place through independent financial advisers (IFAs), who do not have a stock exchange licence. Some experts feel that once IFAs are brought on to the platforms, these will get their biggest boost.