New transaction platform set to boost NFOs' reach

MF Utility, an order routing system for MFs, could help increase the investor base for fund houses considering launching new fund offers

MF Utility, an order routing system for mutual funds, could help increase the investor base for fund houses considering launching new fund offers (NFO).

Currently, fund houses launching equity NFOs introduce these only in cities where it is easy to collect investments and allocate units. This is because a Securities and Exchange Board of India ruling mandates fund houses to wrap up allocations within five days of closing an NFO.

“Now, NFOs are launched only in a few cities that are connected by the banking channel to ensure timely allocation of units to investors. MF Utility will not only connect with all distributors, but also with various banks, which would help ensure faster allocation of units,” said V Ramesh, chief executive officer, MF Utility India.

Some believe the number of cities reached could almost double, with many smaller centres being connected through the MF Utility system. MF Utility has already tied up with ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank to conduct NFO transactions. However, so far, none of the 44 public sector banks have agreed to join the MF Utility platform.

MF Utility is a system through which all purchases and sales of mutual fund units will be routed, making it the central database for all investor-related information. The MF Utility server will be connected to banks and distributors and transfer and registrar agents (RTAs). The five RTAs will continue to conduct post-process activities such as dividend payment and redemption of units.

When MF Utility was first proposed, it is said to have faced stiff opposition from RTAs and fund houses, who were against data-sharing, as they believed it would be counter-productive to them. The issue has now been resolved, with MF Utility expected to bring about 500 points of services of CAMS and Karvy — the two largest RTAs in India — under its aegis.

“The cost details are being worked out,” said Ramesh.

In a letter, MF Utility had asked BSE and the National Stock Exchange to route their mutual fund transaction processes through MF Utility. However, exchanges are yet to respond to this. According to the letter, seen by Business Standard, the exchange mutual fund platforms will be able to “upload a consolidated transaction file, irrespective of the underlying asset management companies involved in the transactions”.

The benefit of a single consolidated file will also be extended to investors, who will now issue a single cheque for all transactions, not different cheques for different schemes invested in. The cheques will be issued in favour of an MF Utility escrow account.

Many, however, say MF Utility lacks direction. “There is no clarity on many issues and no road map for this system. For instance, there is no clarity on how data will be shared in case a new fund house comes in with a new RTA. Besides, many have reservations about sharing data with other fund houses,” said the head of a domestic fund house. He added of the 43 fund houses, so far, only 24 had agreed to be a part of MF Utility.

Fund houses are given a stake in the MFU based on their AUM size leading to concerns that the MFU would be work  according to the whims of the largest names in the industry.

"If this is so beneficial, why have all fund houses not joined them yet? Until all questions raised by all fund houses are not  answered, the platform is unlikely to succeed. Even the exchanges are unlikely to join them as they would lose business,"  said the head of another domestic fund house. The MFU is expected to announce a soft launch by the end of this month or early August with a hard-launch expected to be held later this year.

New transaction platform push to NFOs

• MF Utility (MFU) – an order routing system – aims to streamline the process of collecting and storing investor-related information
• Information to be obtained through distributors and financial advisors and would be accessible to registrar and transfer agents, select banks and distributors
• So far 24 of the 44 fund houses have joined the MFU
• Benefits for investors include a consolidated account number and single-cheque system
• Official MFU launch to be held by the end of the year