Don't rush to do MF deals on exchange platforms

Despite no-demat rule, investors must assess online options before taking exchange route

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The Securities and Exchange Board of India last week allowed investors to buy and sell mutual funds (MFs) on exchanges without a demat account.

First, the distributor has to register his client on the exchange platform. To purchase units, investors place a request with the distributor, that feeds it to the exchange system. By 5 pm, the investor needs to confirm the transaction by paying online or via cheque.

Both the existing MF exchange platforms - BSE's Star MF and NSE's Mutual Fund Service System, or MFSS - haven't done so well since their launch. Volumes have been thin and mostly driven by brokers putting money in liquid funds.

So, will the demat relaxation bring in MF investors on the exchanges? Maybe not. For one, online investors already have quite a few options available to them. They can buy and sell schemes on the respective websites of the mutual fund houses by filling in their user name and a password or a personal identification number (PIN) to transact. These websites, however, do not give an aggregate portfolio feed.

The other option is online transaction portals such as Fundsindia.com and Fundsupermart.com, which do away with the need to remember individual passwords or PINs. These portals usually do not charge customers. Then, there are online brokerages such as ICICIdirect.com and banks, which require investors to open online investment accounts by paying a nominal fee to do their MF transactions.

The demat requirement is not the only reason investors have avoided the exchange platform. Current exchange platforms do not allow investors to switch in and switch out of schemes, do SIPs or execute non-commercial transactions. Units purchased take a day or two to get credited into investors' accounts. To redeem units, clients have to sign the demat slip and give it to the depository. The depository, in turn, submits the request to the fund house, which gives it to the Registrar and Transfer (R&T) agent. Distributors, too, were not keen to use the platform because of the ambiguity surrounding trail commissions.

Exchanges are working on doing away with these glitches. In fact, MF Simplified, NSE's new platform for executing MF transactions without a demat account that may be launched next month, addresses these issues. Besides, the platform offers a consolidated portfolio view and a single cheque payment mechanism, and does away with the need for distributors to hand in applications separately to the R&T agents. The benefits, however, may not be enough to draw investors. What with Amfi's MF Utility, a centralised distribution platform, also due for launch next month.

The biggest advantage of MF Utility is that unlike the exchange platform, it offers both direct and regular plans. Direct plans are no-commission plans that have higher net asset values as expense ratios are lower. "Doing away with the demat requirement is an enabling step but it's not a game changer. Investors can wait for the MF Utility platform to begin before deciding on using the exchange route," said Suresh Sadagopan, a financial planner.