During the past week, through numerous interactions with investors I realised that one of Securities & Exchange Board of Indias (Sebis) latest rulings has caused some amount of confusion amongst them. A few days back, Sebi passed an order that will allow stock brokers to sell mutual funds as well. While this will open up a new way for investors to buy funds, with stock brokers acting as fund distributors, it has left some of them confused between this new system and the trading of closed-end funds on exchanges.
Closed-end funds having been traded on stock exchanges for over a decade. Generally, units of such funds are available at a discount to the NAV. And this is what some investors expect to happen with other funds too under the new system. Many have asked me if stock brokers will now be selling all kinds of mutual funds at a discount. The answer to that is no. In fact, these two systems have absolutely nothing to do with one another.
What SEBI has tried to do with this new ruling is open an easier and more convenient way for investors to buy mutual fund units. Stock exchanges have a massive network over two lakh terminals across 1,500 cities and town. Stock investors are almost always interacting with their brokers and Sebi wants to take advantage of this well-established set-up by allowing brokers to sell funds as well.
For the investors, this system has a number of advantages as well. They wont have to do their Know Your Customer (KYC) identity verification separately for different transactions. Once its done for a depository account, it neednt be done for fund investments. Other than that, investors will be able to hold their units in dematerialized form, and avail a single unified statement of their stock and fund holdings combined.
This is what this new system of routing mutual fund sales through stock brokers is all about. The closed-end funds being traded on exchanges is a completely different thing as the fund company is not even involved in the transactions there. Investors who need to opt out prematurely sell their units directly to other investors. It is the need to redeem that makes investors sell their units at a discount. The same wont happen when you buy funds from your stock broker.
Now what remains to be seen is how this new system is implemented and adapted. As days go by, the system will evolve but its success will depend on how stock brokers and sub-brokers feel about getting into the business of selling funds. After the abolishment of entry loads, selling funds is not as lucrative. Hence, we cant really expect a lot of brokers to take the trouble of getting an AMFI certification and the other things required to sell funds. At the most, stock brokers might take to selling funds to retain customers by offering comprehensive investment services.
However, I see great potential for this new system. It will be a success if all the right pieces fall into the right places.
Author is CEO of Value Research