Mutual Funds: How Sebi’s order to execution-only platform will impact MF investors

The Securities & Exchange Board of India (SEBI) has introduced a regulatory framework for execution-only platforms (EOPs) in the mutual fund industry. These platforms are now required to be registered and are prohibited from offering regular plans.

Execution-only platforms (EOPs)

The execution-only platform allows transactions in direct plans of mutual funds without the help of distributors. EOPs are defined as digital platforms facilitating transactions in direct plans of mutual fund schemes. Entities registered with the Association of Mutual Funds in India (AMFI) will act as agents of asset management companies (AMCs) and integrate their systems with AMCs and/or Registrar and Transfer Agents (RTAs) for facilitating transactions.

The impact on Mutual Fund (MF) investors

SEBI registered tax and investment expert Jitendra Solanki said that this will increase the cost for investors. They will be charged by tech platforms who were offering it for free along with advisory. 

He further added that investors won't be able to get both advisory and execution from robo advisors now which means most investors will have to think of spending from their pocket to seek professional advice on their investments.

Sebi proposes to create two categories of EOPs

Pankaj Mathpal, MD & CEO at Optima Money Managers said the execution-only platform is available for investors who invest in Direct Plans. SEBI has divided EOPs into two categories. The Category 1 EOPs would need to be registered with AMFI The Category 2 EOPs would need to be registered as a stock broker with SEBI. Transaction fees for Category 1 will be borne by the AMCs so it will not impact the investors but for Category 2 investors will bear the cost of the transaction which will have an impact on their returns.

According to Vinit Khandare, CEO and Founder, MyFundBazaar, up to this point, viable platforms had to adhere to the explanatory advice rules set forth by Registered Investment Advisors (RIAs). It was getting challenging for several investors to adhere to the RIA requirements given the large clientele of these firms. However, it is now more clear according to the present rules that one can function as an execution-only platform. 

“As a fully-fledged RIA in the past, you were prohibited from cross-selling any product that offered built-in commissions. The standards have made it possible for these businesses to develop a revenue model,” said Khandare.

Impact on costs for MF investors depends on the category of EOP

The impact on costs for investors depends on the category of EOP. EOPs registered with AMFI can charge a flat transaction fee borne by AMCs, while broker-based EOPs can levy a flat transaction fee borne by investors, said Amit Gupta,MD, SAG Infotech

“Concerns have been raised about potential increased costs, but SEBI maintains that direct plans will not become more expensive for investors. The choice of EOP category depends on whether the platform can charge clients for services,” said Gupta.

He further added that clarifications are awaited regarding onboarding requirements and transaction fees for Category 1 EOPs. 

As per Gupta, the migration to EOP 1 is expected to be operationally cumbersome for digital players who currently use existing platforms for execution. 

Over the past few years, direct plans of mutual fund schemes have gained traction among investors.

The new framework would be applicable from September 1, the Securities and Exchange Board of India (Sebi) said in its circular.