"There are just too many changes in our industry - the pace is killing", mumbled an industry colleague from the mutual fund industry.No faulting him, for there have been huge changes in this industry, the latest one being online trading through stock brokers.
"This is a welcome step in the right direction, isn't it?" I said.
"Time will tell," he said, pointing out that changes were being introduced before the dust could settle. "Yeah, that's there. But then, this will increase penetration in cities and towns across the country, which is a very good thing for the industry," I ventured. He nodded with a listless smile.
Come to think of it, the move to online trading is something the MF industry should be happy about and thank Sebi for, rather than sulk over. They have not been able to take the products beyond 25-30 cities or towns, till date. And now, in one fell swoop, penetration could increase to over 1000 cities.
But, of course, nitty-gritty issues and details remain to be sorted out. To wit:
Brokerage -- both ways? A stock broker typically charges on both buy and sell transactions. The typical brokerage for delivery is between 0.5% and 1% for a retail investor.
Now, if the same charges are applied for both buy and sell transactions, the cost will be between 1-2%. But this is just the transaction cost. After the entry loads have been removed, many MF distributors have not been charging anything and have been content with whatever the AMC offers upfront and the trail. The costs of doing the transaction with the stock broker will be higher, if the brokers do not decide to charge a lower rate for MF schemes as compared with direct equity.
Cost of advice
Any advice that may be offered will be priced over and above this. A stock broker is already very much engaged in his business. Unless a stock broker takes the mutual fund business seriously enough to invest time and effort, advice may again remain a neglected area.
Worse, advice may not be offered and the brokerage may be collected. The main accusation against MF distributors was that most were not giving advice and were getting paid for the transaction. That could mean a replay of what Sebi wanted to avoid in the first place.
More needed to curb churning
Churning is a practice where the investment made is sold off and new investments are made with that money. This way, a distributor/ broker can keep getting brokerage on a regular basis. This was a major accusation as regards MF distributors. Now that could accelerate. In stocks, there is virtual official sanction to buy and sell in the short term through the blessing day trading has received.
Day trading is speculation and is immensely profitable for the stock broker. Now, with everything being electronic, churning could be a major problem. Exit loads in MFs are a deterrent. But many investors may not be even aware of exit loads and stock brokers can take advantage of such investors. Protection on this front is necessary for this to work effectively.
In fact, Sebi needs to do more to curb churning. Since mutual funds are excellent investment vehicles to participate in equity markets for those with a lower risk appetite, it may be a good idea to have a lock-in of at least 3-6 months. Also, there should be metrics to penalise intermediaries, where the churn is beyond a threshold.
Weaning away clients to stocks
Equity investments for stock brokers are profitable, as they are done with the same money several times in a year. Mutual fund investment, by its very nature, is for a longer investment horizon. A stock broker could convince clients to invest in stocks or PMS schemes instead, which are more lucrative for him than MFs. This is a problem the MF industry has to contend with, as far as this new platform is concerned.
Volatility may increase
Volatility could well go up, as doing things electronically is a lot easier. It is far easier to punch a few keys than to fill forms and submit it to the R&T agent and wait for the transaction to happen. When markets go up or down, MF investments may also display an equity-like wave, going forward. That may increase the requirement for liquidity in schemes. Fund managers may have to maintain more cash, depressing returns for all investors.
What about the direct route?
The option for direct investments in MFs will exist. But for the multitudes who can only buy or sell through a stock broker, this option is blocked. They will need to pay a brokerage. Hence, the no-entry load regime will not benefit the vast majority who are expected to start transacting through stock brokers. Also, those who want to have MF holding in demat form and do not want to pay brokerage will still have to buy directly from the AMCs and then demat it -- a cumbersome process, which involves sending demand drafts and the forms to the AMC and then dematerialising and getting it in their account.
Is the good old distributor dead, then?
Need not be. But the stock broker may have the advantage of directly being able to debit the client's accounts, much like the banks, which a normal MF distributor cannot. Collecting two cheques -- one for the investment and another for fee is onerous, to say the least. To avoid the hassles, the distributor may start partnering with the stock broker or become a sub-broker himself.
Does it really get better for investors?
Only time will tell, as my industry colleague said. Currently, the situation is a bit hazy. There are quite a few issues, which may have to be thought through before implementing it. Investors still need to be on guard, weigh the actions and proceed.
There could be many competing, electronic platforms (apart from the stock broker). Space should be made for different distribution models to emerge, exist and thrive, instead of favouring one model or the other. That is what will give investors the real power of choice.Expectations from the market regulator are high.
The author is a certified financial planner who runs Ladder 7 Financial Advisories. Views are personal.


