If one were to go by the spirit of recent SEBI guidelines, this new avenue for conducting mutual fund transactions empowers the investor with more choice.

Let’s look at some of the advantages for the investor :mutual fund

• It opens up a convenient investment option for the investor. It will now be possible for investors to go to their nearby broker and conduct a mutual fund transaction, just like they do for their share transactions
• The guidelines for investing are exactly the same, or that’s what it looks like. The cut off time for the NAV applicable will still be 3:00 pm – ie, a mutual fund “trade”/ investment executed by the stock broker before 3 pm gets the same days NAV
• Units get credited to the investor’s demat account. Bye bye lost account statements, hello convenience

There are some advantages from the AMCs perspective as well. These are :

• This is the first serious attempt at dematerializing mutual fund units, thereby leading to a saving of costs. No more couriering account statements (they cost over 15/- per transaction) leading to a whiff of fresh air – just a whiff, mind you – in terms of profitability for AMCs
• Broking houses are an additional distribution channel now. With this new rule if you have a stock terminal and you have a local sub-broker you can start selling mutual fund once you are AMFI certified
• This new point of sale will deepen mutual fund penetration and above all it allows AMCs to get into their fold a huge segment of KYC cleared people already dealing in stock markets

As with any new regulation, there will be an adjustment process with this one too and it will be some time before we can fathom the actual change it has brought out. At the outset, investors will not immediately queue broking houses nor will AMCs immediately enroll a ready set of KYC cleared investors.

Some of the issues which need clarification are :

• The stock market investor and the Mutual Fund investor are two distinct species, given their risk appetite/ Why should a stock market investor, with his penchant for high risk, high returns invest in Mutual Funds?
• The million dollar question is – why should a stock broker, who makes a sizeable amount of money by churning his client’s portfolio, recommend a mutual fund which has an exit load component as well?
• There seems to be clarity that the current regulations go beyond ETFs – however, it needs to be spelt out more explicitly for all stakeholders concerned
• There is no clarity on the fees brokers would charge their clients and how these would affect distribution costs of AMCs

While the rule opens a new vista of potential investors, fund houses have the usual convincing to do. You still need to educate the investor about mutual funds and now also about the need to open a Demat account. Even with the seemingly easy target – stock market investors, AMCs will have to develop a different pitch to attract them, as the expectations of this tribe regarding returns and in terms of investment horizons are usually different.

This renewed attempt at market expansion through financial literacy would be intense, to say the least and would further drain the already meagre margins the AMCs enjoy.

Net net, it looks like existing mutual fund distributors need to have an additional service component up their sleeve – providing a demat account to their investors, if they don’t have one already.

For distributors who have a broking arm, the rule will have a little impact. Till the time they condition themselves to the immense possibilities of mutual fund investment dynamics.

Let me end with a small example. My father has historically been a FD/ NCD investor. The only equity he has is what his friends and yours truly pushed him to subscribe to in the good old share certificate days.

It was a Herculean task dematerializing those units – it has been a nightmare explaining to him why he needs to pay up small amounts like demat charges when he paid nothing for his share certificates.

Finally, I found a solution. I have asked him to sell off all his stocks and get into a Systematic Transfer plan in Mutual Fund schemes. All of us seem to be at peace now.

What I shudder to think of is the hundreds of thousands of people like my father, who were confused about stock marketing investing in the first place,  now get further confused by a bunch of eager beaver stock brokers and Mutual Fund distributors armed with the latest guidelines. There are thousands of people like him across all age groups who need to be handled with kid gloves.

Overall, I think SEBI’s new rule is a positive development – I also feel that is a little ahead of its time and one should not rush with deadlines to implement these.

As I have always said, people need to be comfortable, rather than convinced about investments. If pushed too aggressively, SEBI might confuse rather than clarify and thus alienate investors for quite some time to come.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.