Sebi and mutual funds: all set for the next level

The securities market globally has been very volatile in the recent past. Thousand-point movements either way in the domestic market in a single day have become the order of the day. The retail investors are generally always at the receiving end in this kind of high volatility as the market takes a beating. The meltdown of Bombay Stock Exchange (BSE)?s Sensex and National Stock Exchange (NSE)?s Nifty led to erosion of several crores of retail investor wealth.

This is the reason that Securities and Exchange Board of India (Sebi) has felt the need to cut the cost of buying mutual fund (MF) schemes to make it a viable vehicle of investment for the retail investors to participate in the equity market.

Sebi has taken several measures to slash the cost of investing in MF schemes for retail investors. The regulator has decided early this year to waive off the entry load for direct applications, including investments made through the internet in open-ended schemes. The new norms have been made effective from January 4, 2008.

According to the new regulations, the entry load will not be charged on direct applications received by the asset management company (AMC), submitted to the AMCs? collection centres, investor service centres and through the internet. However, the regulator has maintained that the applications routed through any distributor or agent or broker will continue to attract entry fees.

The opinion of the MF industry is divided as to what extent the new norms will benefit the retail investors. One view is that the new norms will encourage investors to make investments through internet because they can save the entry fee ranging between 1% to 2.5% in the open-ended schemes.

Explaining the logic behind the regulator taking several steps to reduce the cost of MF schemes, M Damodaran, chairman, Sebi, recently told a gathering of financial players that the regulator was working to cut costs of the schemes so that it will help retail investors, specially first-time investors, to enter the equity market through the MF route as it is safer compared to direct investments into equities.

However, there is a counter view, which says that the waiving of entry load will help only a miniscule percentage of the investor population because the majority still depend on distributors for choosing a scheme out of more than 760 schemes available in the market. The distributor, here, plays a dual role: that of a financial advisor as well as the seller of the schemes to the investors.

Hence, these new norms can bear fruit in the real sense only when the investors break this hurdle to invest in MF schemes. This can happen only if investors throughout the country are educated about the financial market. Both Sebi and the MF industry have taken some initiatives to educate investors, which can be intensified further.

Sebi?s initiative to reduce the cost of MF schemes has not been restricted to the waiving of the entry load. The regulator has announced last month that the provision of charging initial issue expense and amortization of the same will be scrapped. Currently, MFs are allowed to amortise upto 6% of the resources mobilised in closed-ended new fund offerings (NFOs). The regulator has directed the MF industry to meet their sales, marketing and other such expenses connected with sales and distribution of schemes from the entry load.

In light of this, Damodaran has stated that the regulator is working on a fee and cost structure of the initial issue expenses which will be finalised soon.

Mutual fund industry experts feel Sebi?s activism to cut costs of MF schemes has come after getting a signal from Prime Minister?s Office (PMO) and the Union finance Ministry to make MFs a viable vehicle for retail investors to participate in the equity markets.

This was also evident when C Rangarajan, chairman, Economic Advisory Council to the Prime Minister, also asked financial players this month in Mumbai to ?bring in more retail investors, especially those in small towns and rural areas, into the fold of MF investment.? He asked the industry to create awareness among investors regarding both risks and rewards of MF schemes.

No doubt, the success of NFOs and the failure of the IPOs of Wockhardt and Emaar MGF indicate that there is a shift in investor interest towards the former. Even the trading volumes in the secondary market have also narrowed down drastically due to non-participation of the retail investors in a volatile market.

The MF industry needs to realise this changing mood of the investors and grab the opportunities emanating from this critical situation created mainly due to the subprime mortgage crisis. There is enough investment appetite among investors in the B and C class cities towards MF schemes because the investors are not getting satisfactory returns from the traditional asset classes like bank fixed deposits.

Experts, however, say the industry must expand its network in non-metros. And MFs need to also consider wooing larger sections of the population by having their promotional literature in regional languages as well, to convey their message to retail investors in the regions.

This will not only help investors, but even the industry will benefit from higher assets under management (AUM), which could then rise much higher than the present cumulative corpus of around Rs 5.48 lakh crore.