Limited benefit for investors

Sebi's move to allow distributors to transact directly on exchanges should be extended to trading in ETFs

There is some good news for mutual fund investors, though the financial benefits might not be too high. With the Securities and Exchange Board of India (Sebi) allowing mutual fund distributors to directly buy and sell on bourses, one layer of mutual fund transaction through a stock exchange platform, the stock broker, will soon be not required. Over time, transactions could become faster as well.

Though the exchange platform for mutual funds was launched four years earlier during C B Bhave’s tenure as Sebi's chairman, there wasn’t much traction because only select mutual fund distributors were members of the stock exchange. And the cost to become a member was quite expensive by a mutual fund distributor's standards.

The minimum net worth requirement to become a trading member at the BSE and National Stock Exchange is between Rs 25 lakh and Rs 1 crore. Most mutual fund distributors, who operate on wafer-thin margins of around 0.05 per cent (for liquid funds) to 1.25 per cent (for equities) of their assets, don’t have such cash to spare.

Says Sanjay Sinha, founder, Citrus Advisors: “The benefits of this step will be seen in the long term. The regulators are working towards convergence of repositories. First, there was demat of stocks, then demat of insurance was allowed and now, mutual fund units transacted through the exchanges will be maintained in the demat form.”

While Sebi has said mutual fund distributors who want to transact will have to pay some fee, it will be quite nominal, said exchange sources. Also, the investor’s money will not be at risk because the distributor will only buy and sell mutual fund units, but the payment for them will be directly received by clearing corporation.

For investors, the good news is that all these financial transactions in mutual funds, stocks and insurance can now be maintained in one demat account. There is a cost attached to a demat account--around Rs 250-500 annual fees plus transaction costs.

The market regulator has also introduced no-frills demat accounts for retail investors who have invested less than Rs 50,000. These accounts have no annual maintenance charges for investments up to Rs 50,000 and Rs 100 for investments from Rs 50,000-2 lakh.

However, market experts believe Sebi should also allow mutual fund distributors to trade in exchange-traded funds (ETFs). An ETF is normally based on an index, Nifty or Sensex, and is traded on the exchanges. Surajit Mishra, national head, Bajaj Capital, says extending this to ETFs will be a good proposition because it will allow more long-term money into the market  

Though popular globally because of its low cost and risk, they have not done well in India because both mutual fund houses and brokers do not push it aggressively because of low earnings, lower volumes and small ticket size.

It is like a chicken-and-egg situation for ETFs. There are low volumes due to little investor interest and little investor interest due to low volumes. Allowing distributors into the game would help promote these products.