By Dhirendra Kumar
One of the things that I really enjoy doing is talking with
investors. After having being associated with the financial industry
for such a long time, I have often had conversations with people who
belong to the industry. But I find it important to get a perspective
from the other side as well, and hence, conversing with investors is
something I look forward to.
During the past week, through
numerous interactions with investors I realised that one of Securities
& Exchange Board of India's (Sebi's) 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 won't have to do their
Know Your Customer (KYC) identity verification separately for different
transactions. Once it's done for a depository account, it needn't 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 won't 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 can't 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
MY COMMENTS -
Read carefully the highlighted point which my friend made.
