Simplicity and speed to make a paradigm shift

In a move that will speed up the penetration of mutual funds (MF) to the investing community in the country, the market regulator Sebi recently allowed online trading of open ended mutual funds in the browses. Soon after that, last week, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) launched the online trading of mutual funds.

The NSE started trading with 30 schemes of UTI Mutual Fund and BSE Star ( the name for BSE’s MF platform) started with 103 schemes from 20 funds. On day one NSE saw 316 applications worth Rs 78 lakh and on the first day (Friday) BSE saw 250 orders worth Rs 8.44 crore.

Online trading platform of MF will enable investors with demat accounts to buy MF units on the exchange. Transactions on the platforms will be processed on the same trading day on which the investor’s funds are credited to the MF’s bank account. Participants will be able to access the system from 9 am to 3 pm.  Reflecting the mood of the industry on the launch of the platform, Association of Mutual Funds in India (AMFI) Chairman A P Kurian said, “We welcome Sebi’s initiative as it gives the investors yet another avenue to invest in mutual funds in an easy manner. The most important aspect to this is the reach that is available.”

For NSE national Securities Depository Ltd (NSDL), is the only depository participant while BSE has also appointed NSDL and Central Depository Services (India) to facilitate the new venture. Online trading of MF has come at a time when the MF companies in the country are faced with declining funds flow after the Sebi banned charging of entry load to the investors in Septenber 2009. As MF companies stopped paying commissions to dealers and agents (the entry load was used for this purpose), they in turn stopped pushing MFs to customers. Consequently, fresh investments in equity funds dropped 51 per cent in November 2009 to Rs 4,261 crore from Rs 8,737 crore in the previous month according to data released by AMFI. Hopefully, online trading will become popular & will revive retail investors’ interest in MF.
For investors, the launch of online platform will definitely bring in convenience and  add to the ease of transaction. Agreed Value Research Online CEO Dhirendra Kumar, “Investors won’t have to go through the KYC (Know your customer) route if they have a demat account as demat accounts are already KYC compliant.

Boon to Investors
The demat account will reflect in his statement.” Investors not having demat account can place orders in the physical mode through an AMFI certified broker by providing specific KYC documents. In the case of physical mode of placing order, investors are required to submit redemption request stating the folio number and PAN card.
Customers will also have better reach through the platform and may get better services as broking firms will compete with each other on service and delivery. The cost of investments will come down too as distributors charge between 50 and 100 basis points (0.50 and 1.00%) as transaction fees, while the brokerage fee on online trading might range between 25 and 50 basis points for equity investments. The benefit will be substantial for institutional investors who deal more in big ticket transactions.

The speed of online transaction will also help investors to switch much faster from one scheme to another if he is unhappy with a particular fund. Thereafter, the exit load shall be automatically deducted from the investment and the balance will be used to buy new fund without any paper work. 

Using the BSE & NSE platform investors can also apply for new fund offers (NFO) and additional subscriptions. Fidelity Mutual Fund, for example, has just announced that its NFO for Fidelity India Value Fund (FIVF) will be available for online investment. Said Fidelity International, Managing Director and Country Head - India Ashu Suyash, “We realised the importance of the platform to broadbase our penetration and did not want to miss out on the opportunity. This is likely to spur the growth of more retail investments into mutual funds.”

To help an investor make a choice, the platform will also be loaded with information on various mutual fund schemes, their performances, updates, analysis and trends. Another interesting facet of the online portal will be its ability to provide investors a consolidated view of all their mutual fund holdings enabling him keep track of his investments.

Simpler procedures
Just like share transactions the MF trading platform will be linked to the demat and deposit account of investors coming through a broking entity. Commissions and payments for settlement, if any, will get settled automatically from the deposit account of the investor. The new platform will make the procedure of investing for mutual funds a lot simpler. Units of mutual fund schemes will be permitted to be transacted through registered stock brokers of recognised stock exchanges and such stock brokers will be eligible to be considered as official points of acceptance.  The traditional method of investment involves quite a bit of paperwork as investors have to go to a distributor’s or the asset manager’s office, fill out a series of  forms and then sign a cheque equal to the amount he wishes to invest in the fund.

Deep penetration
Asset management companies or AMCs who manage mutual fund schemes has also welcomed the new initiative as it would  help them gain a foothold in areas to which they did not have access earlier. As Kumar of Value Research Online said, “The whole idea is to use the infrastructure of the stock exchanges to sell mutual funds.” The infrastructure proposed to be used includes more than two lakh stock exchange terminals in 1,500 locations. This is big jump from the present reach of the industry in 25 to 30 cities in the country. Now penetration can go up to over 1,000 cities.
As Axis Mutual Fund National Sales Head Karan Datta said,  “It is a very good move that gives us immediate access to a large number of retail investors. I am of the view that there will be huge surge in retail investments in the next 18 to 24 months.” Potential to tap is huge too as Quantum Mutual Fund Director I V Subramaniam pointed out, “Bank deposits in the country today stand at Rs 40 lakh crore, while assets under management (AUM) of all AMCs amount to Rs 7.8 lakh crore, or just 16 per cent of the bank deposits. Initiatives like the launch of this new platform will enable the mutual fund industry to tap into this larger pool of savings.”

Apart from helping AMCs tap new markets, the new platform is expected to help them cut operational costs.  Stock brokers will make extra revenue from MF trading by leveraging the existing infrastructure. Considering that the platform has considerable reach and investors located in remote areas of the country can now be easily accessed, the potential for business is huge. Apart from this, any advice that may be offered by brokers will be priced over and above transaction costs, making it an additional source of income. 

But for the distributors, many believe, the online trading platform will be another mail in the coffin after their commission earning was banned by Sebi. But others feel that it will open up new opportunities. As Subramaniam, said, “The role of the distributor will definitely see a metamorphosis —— moving into an advisory mode. Financial advisors are in a profession, not a business, and the launch of this platform will ensure a change in the way distributors work.” Therefore, distributors who do not have the advisory capability will have to build it soon in order to sustain themselves.
In addition to that, they can have a role to play for people who don’t want to transact through a broker or else, they can team up with the broker and take on role of sub-broker. The platform will also help to increase the efficiency of the distributor as more transactions can be executed in the same time frame.

Initial hiccups
The catch with online MF transaction is that unlike shares, MF schemes will not have a real time two-way quote for buying and selling. Units will be sold at scheme specific NAVs (net asset value) announced by the respective AMCs at the end of every trading day. Similarly, while the redemption orders will be accepted immediately, the current redemption cycle of T+2 days shall continue to exist. This means that while the orders will be accepted on day 1, the redemption proceeds shall be credited to the investors’ account only by the third day. As Vinesh Menon Deputy CEO-Online Investment & Stock Broking  Bajaj Capital said, “Its important for investors to understand that mutual funds will not be traded like stocks, where prices fluctuate throughout the day. All transactions executed before 3 pm will get the current day’s NAV, that is, they will be carried out at the value of the NAV at the close of that day.” So, the investor will not have an option or choice to trade or take a call on rates, as in the equity markets.
DH News Service