8 October, 2009
  
 

Industry Trends
Stock brokers to sell mutual funds ?

Picture this scenario: Mr. Sharma calls his stock broker for advice on which PSU shares to buy – he is optimistic about the Government’s disinvestment program and does not want to miss on possible upsides. While discussing merits of which PSU scrip to buy, his stock broker comes up with an idea:

Broker: “Mr. Sharma, why don’t you buy the Religare PSU Fund – it plays exactly the theme we are talking about”

Mr. Sharma: “Yes, I saw that advertisement in today’s paper – Shock Therapy and all that. Maybe I should call my mutual fund advisor and ask him to come over with the forms”

Broker: “Mr. Sharma, there is no need for all that paperwork. Just give me the order over phone – exactly as you would for buying a share, and I will get it executed for you.”

Mr. Sharma : “But what about the application form and the cheque?”

Broker : “No application forms sir, the NFO is listed on stock exchanges, just like all other open ended funds are. All you have to do is place the order over phone. I will execute it and send my person to collect the cheque – like I always do for the shares you buy. You will get the contract note from us – just like you get for shares and we will charge you the same 0.5% brokerage that we charge you for delivery based equity trades”

Mr. Sharma : “That’s great – that’s a big convenience. Yes, please take my order for 10,000 units of Religare PSU Fund”

Broker : “Sure sir. And by the way, would you also like to buy 100 shares of BEML – that could be the first one on the disinvestment list.”
................................................................................................................

Sounds far-fetched? Well, maybe Mr. Sharma will still have to buy the Religare PSU Fund through the regular application form route through his MF advisor, but in the months to come, he can very well buy not just NFOs but all existing MF schemes through his stock broker, on the stock exchanges.

As has been reported, the SEBI committee that is examining the issue of allowing mutual funds to get listed on stock exchanges, is likely to submit its recommendations soon.

http://business.rediff.com/report/2009/sep/24/sebi-may-allow-mf-
units-to-be-traded-on-exchanges.htm

Some excerpts from this press article :
“The Securities and Exchange Board of India is now planning to enable investors to buy and sell mutual fund units through stock exchanges. Fund houses will also be allowed to sell new fund offers through exchanges, helping them to save on distribution costs.

Sources privy to the discussions told Business Standard that a committee under a Sebi executive director has been constituted to look at amendments to the regulations governing stock exchanges, depositories and brokers to push through the move.

Another source said to start with, it would be optional for fund houses to use the platform. Trading on stock exchanges would be in addition to the proposed platform being developed by Association of Mutual Fund of India.
The sources added that Sebi was keen on stock exchange-based mutual fund purchases and sales or redemption because the Amfi platform could take a while to be ready.

The move comes at a time when the market regulator has terminated the system of entry load and put curbs on the levy of exit load on mutual funds.

At present, investors have to approach fund houses to buy or redeem units. On their part, fund houses declare net assets value on a daily basis and trading takes place on the basis of the previous day's NAVs.

Under the new mechanism, fund houses have to offer two-way quotes based on the previous day's NAV for trading.













































Last year, Sebi had mandated the listing of all new fixed maturity plans on the stock exchanges, which had lowered listing fees to push through the move. At present, 83 FMP schemes are listed on stock exchanges but volumes are low.

Apart from the sale and purchase of units, new fund offerings could also be made through the stock exchange channel in addition to those through distributors.

A Sebi official said that stock exchanges would have to make minor modifications to their software to allow for trading through terminals. The move would also require dematerialising mutual fund units.

Asit C Mehta Investment Intermediaries Managing Director Deena Mehta said, "Fund houses can sell new schemes and even units of the schemes floated earlier. Distributors can act as sub-brokers. This will cut costs for fund houses also."

There were over 500,000 trading terminals across 600 Indian towns and cities and Mehta pointed out mutual funds had a presence in 150 of these locations.

She added that trading through the stock exchanges would also mean that the settlement process could take place through the clearing houses of these exchanges.”

..................................................................................................................

A great move for investors

This move is undoubtedly investor-friendly. It will dramatically increase points of access for investors wanting to buy mutual funds : 500,000 additional points of purchase in 600 towns is a big leap forward in terms of reach. It is also far more convenient for investors : instead of filling 5 different application forms and attaching 5 different cheques for 5 schemes (of various AMCs) that an investor wishes to invest in, all he will have to do is place an order with his stock broker for the 5 funds and issue a single cheque in the broker’s name for the total value, inclusive of brokerage.

 

But, what about ARN holders?

But where does leave you – if you are an ARN holder without a stock broking license or a sub-broking arrangement? You are waiting for the AMFI platform to come up – to help you offer a similar convenience : but your wait may be just too long. The AMFI platform should come through reasonably quickly – but a single application form and single cheque are not part of Phase I – that’s on the agenda for a later date. Meanwhile, if this proposal goes through – as it appears it will – stock brokers will be able to offer a much higher degree of transaction convenience than you. They may, incidentally, find it a lot easier to charge their clients a brokerage for mutual fund purchases : there will be no second cheque problem to deal with and they already have a brokerage rate negotiated with their clients for delivery based transactions : all they have to do is apply the same rate for mutual fund purchases.

 

So what should you do?

  • Continue as before and hope that stock brokers don’t start selling mutual funds aggressively?

  • Join a super-distributor platform where you can offer a “channel distribution” arrangement – where your client can place orders online? But then, will that marginalise your role, over time?

  • Consider becoming a sub-broker with an NSE member to ensure that you are able to give the same transaction execution convenience that brokers can – while retaining your edge as an advisor? You can still give him the consolidated statements and periodic portfolio advice – the only difference will be that your office will now have an NSE terminal and you will have somebody in your office taking orders to buy and sell mutual funds – on the NSE, through an NSE member – whose contract note will be issued to your client.

Tough choices – but who ever told us that life was easy?
 
 
Send us your feedback to
......................................................................................................................................................................................................................................................

Home