Monday, November 23, 2009

Killing the mutual fund industry- SEBI style

SEBI wants mutual fund units to be traded through the exchange. This is already happening (or should happen) in closed ended funds and ETF’s. It is generally the experience that brokers do not have any enthusiasm to service the mutual fund investor due to the small change type of business.
SEBI took the first right step in waiving entry load for ‘direct’ applicants. Then it dealt the mutual fund industry a body blow by totally banning entry loads. SEBI has to understand that unless there is some money, no one will undertake activity. Yes, the distributors were screwing the investors with 3 and 5 percent upfront commissions. The NFO market existed only because of the entry load which the distributor got in full, in addition to goodies from the AMC’s. It also ensured that the distributor did not sell existing schemes. Today, we have a plethora of schemes, which mimic each other, have no focus and then fund houses like UTI fold one scheme in to another.
The doing away of the entry load, has in no way diminished investments in mutual funds, as can be evidenced by the steady growth in the Assets Under Management. What it will do however, is to stop the penetration of mutual funds beyond the traditional financial market centres.
The unfortunate part is that SEBI has no say over the insurance companies, which collectively cheat investors through schemes like ULIP’s and endowment policies. Here, the agent commissions can be as high as 40% of the premium paid in the first year and then taper down to around 5% p.a. In addition, the insurance companies dob the investor with administrative charges, management fees etc, that can amount to as high as 3.5% p.a.
As a result, the distributor of mutual funds is now hooked on to insurance products, none of which are insurance products in the true sense. I went to an agent seeking details of pure life policy and except that he showed me everything else! His idiotic logic was that there is some return of money!
SEBI should stop over regulating the harassed mutual fund industry and focus on regulation and ensuring a healthy platform for growth. Micro management does not help, because the regulator has no clue of the industry.
By pushing trading of MF units through the exchange platforms, SEBI is promoting the cause of the exchanges, which are seeking the holy grail of the capital markets. The broker will charge anything between 0.25 to 0.75% for buying/selling mutual fund units. In addition, service tax, turnover tax and STT will be loaded. If the same thing is allowed to the distributor, he will do a better job. In addition the investor would have to have a demat account (for which maintenance charges would have to be paid) and one more round of the obnoxious Kill Your Customer (KYC) compliances would evolve. Further, the stock broker is not going to help the investor in other areas like redemption etc. It will force the distributor to get some kind of a terminal, with SEBI oversight and SEBI will charge a fee for it. SEBI is merely pushing up the costs for the investors whilst pretending to save costs for the investors through making fund houses cut costs!
It is unfortunate that the mutual fund industry is totally at the mercy of the regulator. The investor does not seem to figure at all. Of course, the regulator efforts are clear when one sees the stock markets, where the number of retail investors is steadily declining, only to show a spike when IPO’s open the floodgate for spurious demat accounts.


mindless said...

what about the following advantages:

- ease of transactions

- increased liquidity

- greater disclosures (which i presume will be required if these are listed)

Frustrations Amalgamated said...

Advantages not much compared to what is today. Liquidity is not an issue. Open ended are always liquid, at precise NAV. Disclosure and listing have nothing to do. Listing platform is only and enabling one. Helps the exchange, brokers and SEBI to make some money off the mf investor. Nothing more than that.