Mutual fund distributors say that online trading of mutual funds will leave investors at the mercy of stockbrokers and expose them to further mis-selling

Market regulator Securities and Exchange Board of India's (SEBI) latest effort to shore up mutual fund trading volumes on the stock exchanges has not gone down well with the distributors' community.

Industry experts believe that having mutual fund investments in demat form does not serve investors' interests and will expose them to further mis-selling.

Reacting to an article published a few days back, KN Vaidyanathan, executive director of SEBI, told Moneylife that no investor is being forced to open a demat account for investing in mutual funds. The article said that the regulator has invited suggestions from the Association of Mutual Funds in India (AMFI) by 15 June 2010, on making it mandatory for all mutual fund investors to open demat accounts.

Recently, the regulator sought banks' help to promote the stock market route for mutual funds. However banks' managements were not keen on SEBI's suggestions. The meeting was attended by NSE's deputy MD Chitra Ramakrishna and BSE's deputy CEO Ashish Chauhan. From the banking side, senior officials from Union Bank of India, State Bank of India, HSBC and Canara Bank were present at this meeting.

Ajit Dayal, director of Quantum Mutual Fund, says "The independent financial advisor (IFA) who wishes to make a living from advice will never lose out. His clients may have a demat account but they don't have to trade and transact based on their broker's advice. Brokers provide little value-add as advisors. We have seen in the US how regulators have time and again proven the conflicts that exist in broking houses and investment banks. Their research analysts are told to give short-term views. There have been instances of documented evidence of internal emails saying that a particular stock was 'junk', but then the research analysts gave buy recommendations on the same stock to clients. Yes, I do see a potential problem here.

I do see brokers making their clients flip in and out of mutual funds-just as they make them flip in and out of stocks. It is up to the investors to realise that having a demat account with a broker may subject him to a new kind of mis-selling"
In December last year, SEBI allowed trading in mutual fund units on the Bombay Stock Exchange's (BSE) StAR MF platform and the National Stock Exchange's (NSE) NEAT Mutual Fund Service System (MFSS). But so far, the volumes on both the platforms have not been encouraging. Moneylife had first reported about the low volumes a few months back. Read here: http://www.moneylife.in/article/8/3193.html )

Between 4 December 2009 and 31 May 2010, the BSE StAR platform recorded 3,944 transactions worth Rs29.30 crore of net inflows. The NSE NEAT (MFSS) platform witnessed Rs9.62 crore of net inflows from 30 November 2009 till 31 May 2010.

"I have an investor who is a maid servant and she is investing Rs100 a month in a  systematic investment plan (SIP). If I ask her to open a demat account by paying Rs500 and force her to renew the account by paying Rs500 every year, will she continue her SIP? Her annual investment is Rs1,200 per annum and she will have to spend Rs500 for a demat account every year, which is 41.67% of her annual investment. Is this investor friendly?" asks Ramesh Bhatt, a Chennai-based IFA.

"There is a huge possibility of wrong and opportunistic advice because the main source of income for a brokerage house is trading volumes. What is required is to amalgamate all registrar & transfer agents (RTAs) into a single platform to enable each investor to have a single statement of account for all his holdings," said T Kalyanaraman, a Chennai-based IFA.
"The role of an IFA is that of a financial planner, guide and friend to the client.

By investing in mutual funds through the demat route; the personalised role of an IFA is diminished. The IFA has to become a sub-broker with a national distributor and work according to the policies and objectives of the national distributor whose objective may not always be in the best interests of the mutual fund customer. The reason for this is that the platform they work on is speculative in nature. The broker (who normally trades for his clients on shares) will have no time to give quality advice to the clients," said Sunil Bhagat, a Pondicherry-based IFA.

"I cannot imagine life with compulsory demat. How will an investor get his solutions? In India people don't have a Permanent Account Number (PAN) card as yet and SEBI is asking them to open a demat account," said a Mumbai-based financial advisor.

"Demat totally defeats the very purpose of abolition of loads to bring down the cost of investing in mutual funds. I fail to understand the logic of the suggestion of the regulators," said an IFA.  — Ravi Samalad