Home / Opinion / MF platforms are good but will they work in harmony?

In the middle of January 2014, when the BSE Ltd opens its doors to independent financial advisers (IFA) of mutual fund (MF) distributors to directly buy and sell MFs from fund houses using its stock exchange platform, the 8 trillion Indian MF industry will take one more step towards the hinterland of the country. Last year, the capital markets regulator, Securities and Exchange Board of India (Sebi), allowed some IFAs to use the stock exchange platform directly to aid penetration. Read it here: http://tinyurl.com/l7qr9xu. Earlier, the financial advisers had to become sub-brokers of the main brokers and only the latter had the right to buy and sell MFs on behalf of the sub-brokers.

The emergence of platforms to buy and sell MFs is a welcome step and should intensify as the industry grows. Developed markets such as the US and Australia have multiple such platforms. Having more channels of distribution in the form of these supermarkets bring MFs closer to their customers and distributors. Online access means that investors can keep buying MFs till, say, 2.50pm or so, till just a few minutes before the daily cut-off time of 3pm without worrying about getting physical application forms delivered to the registrar and transfer agent’s (R&T) offices. Units bought after 3pm are bought at the next day’s net asset value.

Initial glitches

Expect several teething problems to come along the way as these platforms emerge. Some of these will be because many people have been investing in MFs the old fashioned way.

The biggest challenge, however, is this: can these platforms be harmonized in such a way that irrespective of where the MF units were bought, you get the information on your portfolio at one place? And if you are an existing MF investor, will it be easy to migrate to one of these platforms?

First things first: if you buy units from the BSE Ltd’s BSE MF Star platform or the National Stock Exchange’s Mutual Fund Service System platform, you will get units in dematerialized or demat form and in your demat account, alongside your equity shares, if any.

Another platform, called MF Utility, which the Association of Mutual Funds in India (Amfi) hopes to launch this year, will offer you a choice to buy units in demat form or in the usual way that you have been buying MF units so far (you buy units and get a statement of account, or SOA). However, you won’t get a consolidated account statement of units bought in both these forms. The demat units will appear in your demat account statement, alongside listings of any equity shares or non-convertible debentures that you may hold. The depository will give you this statement. Meanwhile, your fund house’s R&T will send you a statement of units held in the SOA form. That’s because depositories maintain demat units and the R&Ts maintain SOA units.

Looking for a template

In the US, things are a bit simpler. There’s only one way in which MF units and equity shares are stored—in the electronic form. You can buy MFs from various platforms such as Schwab, TD Ameritrade, and so on. Stock exchange platforms also offer closed-end and exchange-traded funds. If you buy units across platforms, each platform will send you its own account statement. But since units are maintained in the same form, it’s easy for investors to migrate from one platform to another.

Australia, too, has a similar system of multiple platforms but all MF units are maintained in the SOA form. But the interesting thing is that the Australian Stock Exchange (ASX), the country’s primary securities exchange, will offer units in the so-called physical (SOA) format on its soon-to-be-launched MF platform. But units bought from different platforms will not be consolidated in a single account statement.

Back home, there’s a dichotomy. While the R&Ts have found a way to give a consolidated statement (what’s referred to as a common account statement, or CAS) across distributors and platforms—a system that’s better than even that of some of the developed markets—the two different ways of holding MF units (demat and SOA) remains a challenge.

CAS shows only SOA units and not the demat ones. Your demat account statement does not show the SOA units. Even though the R&Ts get details of all demat units (this exercise helps them dispatch trail fees to distributors), Sebi has made it the responsibility of the depositories to give account statements for demat units. Hence, despite the ability of R&Ts to include even the demat units in the CAS they give out, they don’t.

In a country like India where MF penetration is low, and the industry is—I hate to say the word “nascent" so I won’t—in its growth stages, technology should move, eventually, to a place where we get all our holdings in one single statement, be it demat or the SOA way, irrespective of where you buy from. Perhaps when the Financial Sector Legislative Reforms Commission report becomes a reality, we can nudge ourselves towards solving this little technology riddle.

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