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Good for industry, good for investors

BS Reporter / 19 Aug 12 | 12:59 AM

Investors would be a tad disappointed with the Securities and Exchange Board of India’s (Sebi) latest measures to ‘re-energise’ the mutual fund industry. The market regulator has put the onus on them – by increasing some costs marginally– to provide more funds for the industry and distributors.

So, the expense fee is up 20 basis points. Then, there is another 30 basis points if the fund house collects 30 per cent of its money from smaller cities and the service tax incidence will be on the investors – all these will increase the costs for the investor.

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While Sebi’s changes have received both bouquets and brickbrats, the exact manner in which they will play out, will only be known over a period of time.

On the face of it, the increase in the permissible total expense ration (TER) is a negative measure for investors and a positive one for the asset management companies (AMCs). However, it is not as bad as it seems. First of all it is not applicable on the entire corpus of the scheme. Only that portion which is procured from the smaller centres will be eligible. Hence, the TER will not rise by a uniform 30 basis points for everyone.

The weighted average will be much lower. This is a small price to pay if it achieves the objective of increasing penetration.

The introduction of a new plan for self directed investors plugs a gap which has been existing since January 1, 2008. Self-directed investors (such as ones who invest through a mutual fund’s website) have often asked why they should bear the trail commission component in their Net Asset Values when they are investing on their own, This change will remedy that unintended consequence. This will spur more investors in the top 15 cities to invest on their own. After all, they are the ones supposed to be more enlightened and more at ease with technology.

Easing the process for enrolling distributors should have a positive effect in terms of enrollment in the case of smaller centres in the long term. However, increasing the number of educated but ‘mutual-fund illiterate’ agents will actually increase the training costs for funds. After all, selling a relatively complex product like a mutual fund is different from selling Government guaranteed savings products such as National Savings Certificates.

Again, different levels of certifications will not be of much help if the consumers / investors are unable to discern one from another. This is only going to help the cause of educational institutes who provide coaching for such certifications. A reduction in the fees for the exams and registration, is a good, albeit, not critical proposal. After all, serious distributors will keep their registration alive, despite the fees and the ones who are not serious will not continue even if there are no charges.

Proposal Impact
E-IPOs and ASBA enhancement  Useful, but no short-term positive impact
Increase in minimum application 
amount and guaranteed allotment
Increase is minimal. Guarantee may 
help widen shareholder base
Employee Benefit Schemes cannot 
purchase shares from the secondary
Not good for existing shareholders .
as the number of outstanding
shares will increase

The service tax and brokerage aspect is not such a big issue as it is being made out to be. Across industries providers are passing on the service tax to consumers, who are paying up without a murmur. To top that, here the tax is levied only on the fund management charges and not on the entire expense ratio. Hence, the final impact on the investor should not be significant. To offset this, the cap on brokerage that a scheme pays, is bound to help the cause of investors.

The relaxation in the requirement for PAN card for applying for mutual funds, appears to be a cosmetic move. It is unlikely to result in hordes of farmers queuing up to purchase units by paying in cash. But more pertinent, there is no clarity on how the redemption proceeds will be processed. It is highly unlikely that it will be in cash. This may be a bigger impediment than the PAN Card for such prospective investors.

Mis-selling and churning are widespread evils. However, as in the case of insider trading, it is difficult to pin down offenders who mis-sell. Usually, agents make clients sign on undertakings that they have understood the features and are cognisance of the various risks involved. If at all, push-comes-to-shove, agents could always hold up that document as evidence that they were in compliance.

The additional 20 basis points towards penalty for early redemptions may not really deter inveterate traders, as the figure is fairly insignificant. However, it is a non-event for investors who remain invested.

A slew of measures have been proposed, aimed at safeguarding the investor against wolves in sheep’s clothing. Unfortunately, there are so many stratifications available within the proposals, that virtually everyone will be eligible to serve as an advisor. Ultimately, investors will go to the ones they trust, irrespective of whether the Regulator believes they are eligible or not. The only puzzling thing is the point which states that people who give advice in good faith are exempt. This could be the Achilles heel of this section.

In a nutshell, the proposals are a step forward. However, revival of the industry may depend as much on market sentiment, as on regulatory forbearance. I only hope retail investors do not flock to mutual funds after the stock market has already enjoyed a stellar run. In that case, no amount of regulation could prevent them from suffering loses whenever the markets undergo the next bout of correction.

But given the thrust of Sebi, it proves that the low retail penetration is the effect of the apathy of funds and distributors and not the effect of the ban on entry loads.

As mutual funds had limited personnel, there was an over-reliance on distributors to garner retail and High Net Worth (HNI) monies. The distributors, in turn, concentrated on the easier pickings (read top cities) which in turn led to sub-optimal nationwide penetration. These moves will hopefully make things simpler.

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