Seamless Investing

By Dhirendra Kumar | Nov 23, 2009
A few days ago, the Securities and Exchange Board of India (SEBI) issued an order opening up a new channel for investors to buy mutual funds. Stock brokers, operating through the same system as used for stock transactions, will be able to act as fund distributors. This is an entirely new way to route mutual fund transactions and promises to offer many conveniences that the current system doesn’t. However, based on my interactions with investors over the last few days, it also offers considerable potential for confusion, which it’s worthwhile to try and clear.
The biggest confusion seems to be between the new system and the trading of closed-end mutual funds that has been done on the stock exchanges for more than a decade now. A number of investors have asked if funds will be available at a discount to the net asset value (NAV) from brokers, just as closed-end funds typically are. The answer is that no, they won’t; the two systems have nothing to do with each other. Listed closed-end funds are bought and sold on the exchanges just like shares. This trading is done between investors; the fund company is not involved in the transaction.
Typically, closed-end funds cannot be redeemed from the fund company till their tenure is over. Fund companies are required to provide an early exit option for such funds by listing them on a stock exchange. Investors who need to redeem their investments prematurely can do so by selling them to other investors on the stock exchange. Since these transactions are typically driven by the seller’s need to encash his holdings, they are often done at a discount to the NAV of the fund.
The new system has nothing to do with this. It is basically a way of extending the stock exchanges massive network to facilitate the buying and selling of mutual funds. This network extends to over 2 lakh terminals in 1,500 cities and towns across the country which are linked to a centralised system. Apart from an extended reach, the new system offers greater convenience for investors. Investors will need to get their KYC (Know Your Customer) identity verification done just once and use it seamlessly for all their investments. Also, they will be able to hold their fund units in dematerialised form and get a single, consolidated statement of holdings just as they get for stocks today.
Investors who already have a depository account and have had their KYC done through a depository participant need not do so again. The new system essentially uses the existing stock exchange mechanism as a system for routing mutual fund investments from investors to fund companies. However, this is early days and some details of the system are not yet clear and will probably evolve as the system is implemented.
Beyond the mechanics of this system, its success will depend on stockbrokers and sub-brokers getting into the business of selling mutual funds. Its not as if every one of them will get up tomorrow morning and be raring to go out and sell funds. They’ll have to take the trouble of getting an Association of Mutual Funds of India (AMFI) certification and everything else that is needed to set themselves up as fund sellers. It remains to be seen how many of them will find the commercial motivation to do so after the abolition of entry loads.
Nonetheless, this is an innovative move that has the potential to become a significant milestone in the development of mutual funds in India. Hopefully, all the pieces that are needed to fulfil that potential will fall into place quickly