Trading MFs through brokers may not be cost-effective for investors  

In a move to increase the reach and availability of mutual funds (MFs), market regulator Securities & Exchange Board of India (SEBI) has proposed trading of mutual fund units through stock brokers. While this move, which SEBI plans to introduce by March 2010, may be well-intentioned, there are certain issues that need to be ironed out for it to be a hit among retail investors.
 

Existing MF holders who do not have demat accounts need to open depository and brokerage accounts. Opening a brokerage account involves an initial deposit and various expenses such as annual maintenance charges and brokerage charges per transaction. According to industry sources, the commission structure will roughly be equal to that of a delivery-based brokerage, that is, 0.25% to 0.50% of the total transaction value.
 

So, from investors’ point of view, the entry load, which SEBI abolished in August 2009, will be replaced by the cost of opening a demat account and payment of brokerage charges for each transaction.

 

For investors holding physical MF units, the charges for dematerialisation would vary from broker to broker. “It could be a fixed charge of, say, Rs25 plus Rs3 per MF statement. However, the charges will have to be approved by SEBI and the stock exchanges,” said Chandrashekhar Layane, senior vice-president, FairWealth Securities.

 

In addition, “a broker can charge 1% or 1.5% as management fees based on the total assets under management (AUM) of the client, subject to SEBI approval. For this to happen, further clarification is required from SEBI,” said Mr Layane.

 

Earlier, MF distributors received commissions when investors bought MF units, but not when investors sold units. However, stockbrokers can charge brokerage from both buyers and sellers.
 

Brokers may also levy advisory charges, although their knowledge and expertise in dealing with MFs is open to question. As brokers are more conversant with equity markets, they may not be inclined to focus on MF investors.
 

Also, there is no clarity yet on the NAV (net asset value) at which MF units will be traded through stockbrokers. Currently, MF houses calculate the NAV of a scheme based on the previous day’s share prices. Moreover, trading MF units through the stock exchanges will expose them to a higher level of price volatility.

 

According to SEBI , “Stock exchanges with their reach covering over 1,500 towns and cities and through over 200,000 stock exchange terminals can be used for facilitating transactions in MF schemes. The stock exchange mechanisms would also extend the present convenience available to secondary market investors to MF investors.”

 

SEBI’s new move to increase retail participation in mutual funds will succeed only if it reduces the transaction cost by implementing norms that dissuade brokers from overcharging investors through a plethora of ‘hidden charges’.
– Ravi Samalad [email protected]