Where is Mutual Fund Industry going ahead?

1. The regulator wants MFs to be traded more via exchanges and demat account and less ivia physical forms and cheques as in today

2. The regulator wants the trades to be done via broking terminals and not through AMC, or R&T offices as in today.

3. They investor has to cut a cheque favoring the broker and the broker will allot units post realisation of cheque as is done in case of equity shares today, the R&Ts will based on the order of the broker, credit daily units to broker account which would be pooled and then transferred to the clients demat account on T+3 basis

4. This means an advisor has to become a sub broker and route his trades that way and most probably lose his identity forever

5. In all this hopefully, the regulator may come out with a simple mechanism by which an ARN Holder can also participate directly 

without going through a stock broker. It remains to be seen whether the IFAs are even a point of botheration for the regulator even.

The regulator messed up big time with the entry load ban, which was a knee jerk reaction, and now is trying to desperately try to revive business, since MF trading via terminals did not take off either, they are now forcing funds to offer units in demat form. 

What they seem not to realise ( or do not want to realise ) is that MFs attract a different species of investors compared to stock investors, and also even the claim of stock brokers having so many points of presence via MFs presence is also circumspect because i frankly do not think stock brokers open terminal across towns to educate investors or to make them invest in fundamentally good stocks for long term but to simply speculate using the low cost brokerage/free first year demat as a lure for speculation.

The theory was that entry load ban would make the MFs more cheaper (true) and hence more people would rush to buy it( false), If there is no one to tell the investor about a product you might as well not have the product ( Remember NPS?, they are going to make it costlier and empanel distributors and pay some brokerage for it so that it can be sold ! The new PFRDA chairman has gone as far as saying that the idea that a good product will sell itself is wrong and that PFRDA made a mistake)

Economist J.M Keynes said "When the facts change, I change my mind. What do you do, sir?" The fact is that MF sales are dipping, fact is that no one is interested in selling for charity, whether the regulator would change its mind or stick to its opinion is what we need to see.

- Shankar,    shankar.yes@gmail.com

Now, transfer demat MF units freely

By Kayezad E. Adajania on Sep 08, 2010 with Comments

Source: http://mintmoney.livemint.com/mutual-funds/2010/09/now-transfer-demat-mf-units-freely/

On 6 September, the Association of Mutual Funds of India (Amfi), the mutual fund (MF) industry body, wrote to the capital market regulator, the Securities and Exchange Board of India (Sebi), requesting the regulator to postpone the date of implementation for a recent Sebi ruling that mandates all asset management companies (AMCs) to allow investors to freely transfer their dematerialized MF units.

In a circular that Sebi issued a couple of weeks back, it had made it mandatory for all AMCs to implement the rule by 1 October. As per the new ruling, you will be able to transfer your MF units, held in demat form, to your spouse, parents, children or even near and dear ones directly from one demat account to another.

Boosting MFs’ stock exchange platform

It’s been nine months since Sebi allowed MF units to be traded on the stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), but the move hasn’t yet taken off. Less than 0.01% of the total inflows into MF schemes come through stock exchanges. Apart from getting stock brokers to sell MFs—in the absence of entry loads against equity shares that fetch them upfront brokerage—experts cite lack of awareness and the risks that brokers carry as the key reasons why the stock exchange platforms haven’t yet taken off.

Click to see the larger image

Time and again, Sebi has been taking steps to popularize the stock exchange platform. Some months back, Sebi allowed National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) to convert existing physical MF units into dematerialized form so that they are transacted on the stock exchange. Now, Sebi has allowed these units to be transferrable. Some news reports say that Sebi also intends to make listing of all MF schemes on stock exchanges compulsory soon.

Sebi is expected to bring trading on MF units on a par with share trading. At present, MF units directly reach the investor’s account; the second phase will see units reaching the broker’s pool account first. Only when the client’s cheque gets cleared will the broker release the units from his pool account. As of now, since the units reach the client’s account directly, (but the broker initially pays out of his own pocket since the MF has to receive money on the day after punching the buy order), the broker stands to lose money if the client’s cheque (that takes about a couple of days to clear) bounces.

“Once the second phase kicks in, brokers will get units in their pool account. They will, therefore, transfer it to the unit holder’s account only after the money is realized. This should be a major boost to the MF trading platform on the stock exchanges,” says Rakesh Goyal, senior vice-president, Bonanza Portfolio Ltd, a Mumbai-based financial services company. Cyrus Khambata, senior vice-president, CDSL, said that the second phase will start in about two months.

What this means?

If you hold shares in demat form, you can transfer them to whosoever you want, provided the receiver, too, has a demat account. You can either sell the shares on the stock exchange during market hours or can transfer to someone during off-market hours as part of an off-market transaction (a buy-sell transaction done outside of market hours).

Transfer of MF units has been a grey area until now. Though the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, permit MFs to allow investors to transfer their existing MF units, fund houses have not allowed all unit holders to transfer their units, en masse. Since fresh units are continuously created, a transfer facility is not really merited. Only in select cases, for instance a unit holder’s death, have they allowed units to get transferred. In this case, the MF units get transferred to the second holder or the nominee. Or, say, you pledged your MF units to a bank for a loan and you default on the loan, the units get transferred to the bank.

How to transfer MF units?

When you buy and sell MFs, you essentially transact with the fund house. If you wish to give your MF units to somebody else, the easiest—and the only—way to do it is to redeem your units and gift the money.

After 1 October, you won’t have to redeem your MF units and will instead be able to enter into an off-market transaction directly with the person you wish to transfer your units to. On the other hand, when you sell your shares or MF units on the stock exchange, you don’t know who buys them.

An off-market transfer gets done through a special procedure. However, these are early days and it’s unclear as to how transfer of MF units will take place in an off-market transaction. For instance, most brokerages mandate customers to fill up a power of attorney (PoA) at the time of opening an account. A PoA restricts transfer of shares through off-market transactions; you can only transfer shares to a demat account in which the sequence of account holders is exactly the same as the account from which you are transferring your shares. In other words, you can only transfer to your own account, elsewhere.

Market experts say that to effect an off-market transfer, you will need to revoke the PoA, fill up the delivery instruction slip and submit it to your depository participant. There’s a cost attached—about 0.04% or about `15-25.

Who pays the exit load?

Among a few key issues is how would the MF industry charge exit loads. Many equity funds levy an exit load for premature withdrawal. Debt funds, too, levy exit loads to discourage premature withdrawals.

First, off-market transfer need not happen at the market price, though experts say that in many cases it happens close to the market price. Second, when unit holders redeem their units, the fund house deducts the load amount from the redemption value and returns the rest to the unit holders. However, when you transfer MF units (off-market transfer), MFs do not have a way to find out whether or not you pay the exit load.

“At present, the fund house deducts exit loads, which are used to meet costs incurred by the fund house. Once investors start transferring their units directly to other investors, who will remind the buyer to deduct exit load from the purchase price,” says a chief executive officer of an AMC who did not want to be named.

Some fund houses have a different view. The head of operations of a Mumbai-based fund house said that perhaps the industry may take a view to exempt transfer of units from exit loads. “Exit loads are levied on the units redeemed. In case of off-market transfers, MF units are not getting redeemed. They are in perpetual existence. Hence, the MF industry may come to a consensus to waive off exit loads in such cases.”

While this may ease operational issues, it could create a disparity between different classes of investors—those who hold physical units and those who hold demat units. In an industry that is still reeling under the removal of entry loads, this may only add to the present worries. That apart, the rationale of exit loads—to deter premature withdrawals—might get lost.

Can costs rise?

When off-market transfers start, MFs would need to track them as and when they happen; practically, every day. This is mainly to distribute dividends, if any, to the correct unit holder. This could be a problem if too many investors change hands and the fund house declares dividends in the interim.

At present, for units that get traded on the stock exchange MF platforms, the two main depositories, NSDL and CDSL, send regular information to all MFs’ registrars and transfer agents (such as Computer Age Management Systems and Karvy Computershare Pvt. Ltd). Called benpos, or beneficiary position, this gives information about the unit balance as on that day and the name of the unit holders who hold these units. While CDSL gives benpos on a daily basis—only to MFs—NSDL gives it once a week. Anything extra comes at a cost.

“If MFs were to take benpos daily, it could incur huge costs to the MFs. As the total expenses that we charge to investors on an annual basis are capped, the AMC will have to bear the cost,” said a chief of another fund house, who also did not want to be identified as the matter involves the regulator. Added work at the registrar’s end may also lead to an increase in their charges, which would further burden the fund houses, he added.

Who’ll deduct tax at source?

When non-resident Indians sell MF schemes, they pay tax deducted at source (TDS). For equity funds sold before a year, you pay 15% short-term gains tax. On other MFs, you pay 30% TDS if you sell before a year. You pay 20% TDS if you sell after a year. Since this is TDS, the MF deducts it and redeems the balance to a non-resident Indian (NRI) who submits a redemption request.

Once units get freely transferable, it’s unclear as to how the MF will recover this TDS from the NRI. As of now, there seems to be no mechanism that ensures this.

Sebi’s latest move, though, seems to have caught the MF industry off-guard. Although some fund houses privately admit there’s a lot of work to be done, many fund houses are hopeful of finding a solution. “Clearly, not doing anything is not the answer,” said an MF official, who heads operations in a bank-sponsored MF. He expressed confidence that a reasonable solution will be found. Hoshang N. Sinor, chief executive, Amfi says: “It is a good idea, but there are operational challenges in implementing this. We find that it will not be possible to implement this by 1 October. The matter doesn’t just involve MFs and their agents, but also depositories like NSDL and CDSL, and stock exchanges. All will get impacted and it bodes well for the system if all players concerned get elevated and benefit from this move.”