Industry experts say that demat accounts increase the cost for mutual fund investors and will not help in penetration of funds
Stock market regulator Securities and Exchange Board of India's (SEBI) recent plans to introduce mandatory demat accounts for mutual fund investors has again brought forth the issue of cost of investing in mutual funds. The regulator in August 2009 had abolished entry loads on mutual funds to protect retail investors and to bring down the cost of investing.
SEBI had launched the online platform on the National Stock Exchange (NSE) and the Bombay Stock Exchange to penetrate mutual fund products through 1,500 towns and cities through over 200,000 stock exchange terminals.
The NSE started its online trading platform for MFs on 30 November 2009 and the BSE launched its BSE StAR MF platform on 4 December 2009. However, the limited mutual fund knowledge of stock brokers and high costs have not attracted investors towards these platforms.
"Under this regime, the broker will still get 0.25% for a 'buy' or 'sale' transaction.
The mutual fund investor used to pay 2% to 6% for buying the same mutual fund prior to the SEBI ruling of 1 August 2009. So, this is not bad-it is cheaper. There is still room to pay an Independent Financial Advisor (IFA) up to 1% for all his efforts and advice. And by paying two separate charges-a fee for buying or selling on the exchange and a fee for the advice, the investor gets to know exactly what he is paying for, how much he is paying, and whether he is getting value for money for those fees paid. Each market participant-the fund manager, the broker, the advisor-must be good at what he does and get paid for it from a satisfied client," said Ajit Dayal, director, Quantum Mutual Fund.
"If a one-time investor in a mutual fund wants to invest Rs5,000, he has to spend Rs1,000 (20%) of his investment value for demat account opening and other charges, after that also he has to pay yearly charges. If the market is not able to generate returns he will lose 50% of investment in charges only.
If he wants to sell he has to approach the brokers. Today most of the retail investors in stocks lost their money heavily due to misinformation and wrong recommendation by the brokers. In that case investors are not going to benefit," said Vasanthi Krishnamurthy, a CFP.
Currently 17 fund houses sell their units on NSE's NEAT MFSS while 18 do the same on BSE's StAR MF platform. The industry has also seen a slew of exchange traded funds (ETFs) being launched on the exchanges.
Yesterday Moneylife carried an article which voiced strong objections from industry experts regarding SEBI's plans of boosting mutual fund volumes on stock exchanges by allegedly forcing a mandatory demat account for all mutual fund investors. (Read here: ( http://moneylife.in/article/8/6032.html)
Equity funds have seen an exodus of 2.87 lakh investor accounts between November 2009 and May 2010 when the mutual fund industry witnessed the launch of 10 new equity funds in the same period. The regulator has introduced a slew of regulations in the past one year including a crackdown on upfront commissions doled out to distributors.
"The focus must be on getting the products right and on getting each of the financial participants to work in the interest of the investors. Once you have this "pilot" in place-of an orderly and transparent system-then it makes sense to seek penetration. Why give the poor investor in Tier-II and Tier-III towns the terrible products that exist today? Clean up the mess, then offer them the safer products," added Mr Dayal.
"It is true that making investors hold their investments in demat form is a compulsion. In the case of mutual funds, the statements of account are not certificates-hence there is no need to save them from fire or flood; there is no fear of misplacing them (as they are already electronically handled by the registrar); one just needs the folio number," said Alok Khanna, a Kanpur-based financial planner.
"I have not seen any other industry/industries having so much micro-management by the regulator. On one side the government talks of its citizens being empowered and self-sufficient. On the other side it allows such self-defeating regulations to play havoc," said an IFA, preferring anonymity.
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1-demat opening charge(min 500 Rs)
2-demat annual maintanance charge(min250 rs)
3-demat transfer charges-15 rs per security per transaction (minimum)
4-inter depositery benificiary charges( a new way of pick pocketing)
5-demat closing charges-few broking houses use this
6-short delivery charges which can be levied in case of Mf units also if punching is wrong /but it is never levied in present model
7-brokerage on sell and purchase which is normally 50 paisa(.5%) per sell and .5% per buy-with STT and other charges it is .75% or 1.5% in a trade cycle-which is more then AMC charges-
AMC's send printed statements and many other services which are more costly-but AMC's put no extra charge for a 1lac or 1k investor-
Now with all these charges how a retail investor will come forward to invest in MF is a BIG BIG question mark-may be SEBI has some plans to do some CHARITY for MF investors -then it can wipe off all these charges-
but i doubt Brokers and Deposietries will ever do this loss making business
IF SEBI IS ADAMANT ON INSISTING OPENING OF DEMAT ACCOUNT FOR MUTUAL FUND INVESTORS, I WILL BE DEFINITELY LOOSING THESE INVESTORS.