In mutual interest

Rahul Shah, a Mumbai-based financial services professional, began investing in mutual funds three years ago, shortly after he joined a global consultancy firm.

If the Securities and Exchange Board of India (Sebi) had not banned entry loads by then, he would have been poorer by over Rs 3,000 today Stock Market Trading Tips

An investment of Rs 1 lakh would have fetched him Rs 1.59 lakh today, with the Sensex rallying from 17,000 levels in 2011 to over 27,000 now. But an entry load of two per cent would mean that his initial investment would be worth Rs 98,000. The money lost to commissions, and the lower gains because he started with a lesser capital, would have reduced the end-value of his investment to Rs 1.56 lakh at the end of three years.

The annual savings of Rahul and others like him add up to Rs 1,300 crore, according to former Sebiofficials. While the figure may appear insignificant, it would actually rise sharply as, over the years, Rahul or any other investor would typically be stepping up their investments, leading to savings running into a few lakh rupees Financial Astrology Trading Tips

More importantly, the move has long-term implications for all stakeholders, say industry experts.

Says Nimesh Shah, MD & CEO, ICICI Prudential AMC, "We believe this regulation has been beneficial not only to the investors but to all the stakeholders in the business. Investors have an added comfort with the advisors because they are aware that advisors are looking at sustaining long-term relationship with clients. Accordingly, they carefully advise consistently performing funds with a superior fund house pedigree. Thus, investors have generated reasonable returns, and their trust on the distributor and the industry has increased."

Sundeep Sikka, CEO, Reliance Mutual Fund, too, shares a similar view. He says, "This change has initiated a shift towards advisory based model which is beneficial for all stakeholders involved in the long term, especially the investors Nifty Trading Tips

While the distributor margins had decreased initially due to entry load ban, that has been compensated very well by the increase in volumes, he adds.

With the move, SEBI has ensured that consistent performance in the industry remains paramount. Also, the way of generating business merely through NFOs has reduced to 10 per cent while 90 per cent of the flows are generated through existing schemes. This has marked a significant quantitative and qualitative shift for the industry.

And the changes don't stop there. The regulator asked mutual funds to introduce a direct plan effective from January 2013 for those who wished to invest without a distributor. These direct investors have savings of another 50 basis points per year (100 basis points is one percentage point). This would have saved an investor like Rahul another Rs 1,000 since it was introduced Commodity Trading Tips

"I don't use a distributor. I know what scheme I want and invest by going directly to the mutual fund office. It is good to see that all my money is going into my investment as opposed to earlier, when some portion would have been cut for commissions," he said.

Data compiled by Value Research show that during the past one-and-a-half year, over 30 per cent or Rs 3,00,000 crore of the total assets under management (AUMs) in funds came via the direct plan route, though largely driven by institutional players.

Stating reasons for the retail investments not having caught up, Milind Barve, MD, HDFC Mutual Fund, says, "Still people want some kind of hand holding and advisory when it comes to investment in mutual funds. They need some advice on what, when and how to buy Intraday Trading Tips

It's not that easy for investors to choose direct plans as they need to know at least something about markets and mutual funds".

Experts, however, say over time, more retail money is likely to come through the direct route.

"In the long term, there could be more preference for the direct plan (from retail investors) as the advisor based model gains more prominence in the industry," says Sikka.

It's not just that the life of the urban investor has become easier, but the rural investor too has seen benefits come their way. The regulator has also sought to provide greater access to investors from remote areas and smaller towns. Firstly, it allowed fund houses to charge 30 basis points more on the expenses front as an incentive to go beyond the top 15 towns (B15). While this has helped the industry grow, investors in such towns now have increased access to financial products like mutual funds. Today, 15-20 per cent of equity flows come from B15 towns, say industry experts Personal Numerology Trading Tips

Many first-time investors in smaller cities also prefer to invest in cash, which was not permitted under earlier Sebi regulations. For the benefit of retail investors living in smaller cities, the regulations were changed allowing Asset Management Companies (AMCs) or mutual funds to accept cash payments of up to Rs 20,000. This limit was later enhanced in May this year to Rs 50,000.

Another big benefit for the retail investor is investing in mutual funds as well as other financial products will soon become significantly less cumbersome, given the proposed introduction of the uniform Know Your Client (KYC) requirement for all financial products. The government announced it in the budget this year. This will eliminate the need for going through a KYC process when investing in mutual funds, if one has already gone through it for availing of other financial services, such as while opening a bank account or buying a life insurance. Sebi has already implemented uniform KYC in the securities market. So, once an investor gets her KYC done with any of the Sebi-registered intermediary be it a broker or a mutual fund, she doesn't have to redo the process again. The move has helped investors seamlessly switch fund houses with just a KYC-compliant permanent account number (PAN). The uniform KYC for the entire financial sector, however, is yet to be implemented as the various financial sector regulators are in the middle of ironing out the contours of this proposal. The next few months should hopefully see it place Commodity Trading Tips

While the uniform KYC move was lauded, there is one budget proposal - significantly big - which has caused dismay since it effectively made mutual funds less tax effective than they were before.

With a view to remove tax arbitrage between bank deposits and mutual fund debt products, long-term capital gains tax for all debt funds has been raised to 20 per cent from 10 per cent earlier. Additionally, the threshold to claim long-term capital gains tax on debt funds was raised from one year to three years.

Effectively, this led to the removal of the tax benefit that fixed maturity plan (FMP) and debt fund investors enjoyed over more traditional debt instruments such as bank fixed deposits Nifty Trading Tips

The move severely put investors in a disadvantageous situation as investments done prior to the Budget announcement on July 10 were also subjected to the new tax announcements. The move has dented the appeal of FMPs, which was the preferred choice of corporates and high networth individuals for parking their surplus capital in the short term.

"The industry was taken aback by the announcement; a large chunk of flows came into one-year fixed maturity plans (FMPs). But, I think the new tax regime is now serving as an opportunity for the industry to offer medium-term and long-term investment options to investors," said Suresh Soni, MD, Deutsche Mutual Fund Financial Astrology Trading Tips

To prevent an exodus of funds from debt schemes, especially FMPs, fund houses have started to offer rollover of existing shorter-duration FMPs to three years to save on capital gains tax. So far, most investors have preferred to rollover their investments. As a result, the asset under management of FMPs reduced by just five per cent in the month of August compared to the previous months. As on August, the total FMP AUM stood at a little over Rs 1,50,000 crore.

Going ahead, short term FMPs of less than a year will become redundant due to the new tax treatment, believe fund houses, who may just launch these products in duration of three years or more.

While there are clear gains for investors in four of the five big changes undertaken in the last few years, some moves have clearly hurt the industry in the initial phase even as there is debate on the ways to tackle them Intraday Trading Tips

After the ban on the entry load, many fund houses paid commissions from their own pockets even as the number of registered mutual fund distributors fell from a high of 1,05,300 at the end of 2009-10, the year the entry load ban was first announced, to about 60,372 at the end of 2013-14.

In the case of direct plans, distribution plans have required an overhaul. Institutions have picked it up more than retail players. Debt market funds, where institutions dominate, have up to 50 per cent of their money coming in through the direct route. The figure for equity funds, where retail players play the dominant role, is around three per cent.

"The full impact of the direct plan is yet to materialise. But, in my view this had been the most important regulatory change and would change the way the AMCs conduct their businesses in the coming years. Already we are seeing a sizeable chunk of investments coming in via direct route and AMCs have already started re-thinking on the viability of various distribution channels," said Vikaas Sachdeva, chief executive officer, Edelweiss Mutual Fund Free Stock Market Trading Tips

The cash transaction move has also caught most fund houses unprepared. Some industry participants have stated that there is a difficulty in accepting cash as it would need greater infrastructure.

"The move does help in penetration but it is difficult for fund houses to accept cash as they need to have strong infrastructure and work force to handle cash. Only a few fund houses have the infrastructure to handle cash," says Jimmy Patel, chief executive officer, Quantum Mutual Fund.

Currently, while a few fund houses like UTI MF and SBI MF offer the facility of cash transactions to investors, a lot of them have taken a conscious decision of not accepting cash. Besides, although Sebi allowed cash transaction up to Rs 50,000, the repayments, dividends for all investments continue to be paid only through the banking channels Jackpot Trading Tips

However, some like A Balasubramanian, CEO, Birla Sun Life AMC, see it as an opportunity. "Cash transactions allowed by Sebi are still a learning curve for the industry as the sector is going through risk management. I see it as an opportunity to expand in the smaller towns and cities."

On the whole, however, the last five years have laid the foundation for the new bull-run, though not without some missteps along the way Personal Numerology Trading Tips
.