Buying Mutual Funds To Get Simpler

A story that I wrote in the magazine where I work...

Get ready to trade in Funds as simply as it is to trade in equity shares

Isn’t it ironical that when you need to invest in, say, five different mutual fund (MF) schemes, you need to sub­mit five forms and five cheques, but when you want to invest in equity shares of five companies, you either phone your broker or log on to the Internet and complete your transaction? You get a con­solidated account statement of all your equity holdings from your depository par­ticipant (DP), but get statements from as many MFs as you have invested in.

Wouldn’t it be easier if MF transactions could happen as they take place for equity shares? Thanks to the Securities and Exchange Board of India’s (Sebi) chair­man Chandrasekhar Bhaskar Bhave, the Association of Mutual Funds of India (Amfi) has appointed a committee of six MF officials to devise a platform for trad­ing in MF units. The objective is three-fold: to make buying and selling of MF units less cumbersome, to increase pene­tration of the product by encouraging participants across India and subsequent­ly to reduce costs.

MF platforms are not entirely new in India. Three platforms already exist, one of which was launched recently. MF dis­tribution and transacting through dedi­cated platforms promises to be the next big wave in the industry. 

What is anMF platform?

Ideally, MF platforms are a common meeting point for MF houses, agents and investors. What you get to see on a web­site has a whole machinery working at the backstage that integrates your data and investments and channelises it to appropriate partners. Typically, agents have to open accounts on such platforms to be able to trade MF units on behalf of their investors. These platforms also dou­ble up as an agent’s back office. So, he need not invest in sophisticated software or spend time manually preparing com­plex reports for clients. He can just use the ample tools available on the platform (like in a website), cull out statements of hold­ings with the latest net asset values (NAV) and other information about the portfoli­os, and send you newsletters or state­ments or even answer any queries.

In countries like the US and Canada, platforms also enable investors to open accounts and trade in MF units directly, bypassing agents. Advanced platforms enable you to trade in MF units electroni­cally and help eliminate or at least mini­mise the paper work.

MF platforms in India, however, are as yet not open directly to investors; only agents can access them. They are simply a link between agents and MF houses. NJ Fundz Network, launched in July 2003, is by NJ Invest, one of India’s largest MF distribution houses. FUNDSNet, launched in 2006, is by Computer Age Management Services (Cams), India’s largest registrar and transfer (R&T) agent. iFast (launched in May) is run by iFast Financial India, a Singapore-based entity that already has a successful platform in Singapore, manag­ing assets of around $1.8 billion.

How does it work?

There are differences in the way the three existing platforms work.

FUNDSNet. When agents join the FUNDSNet network, they get a username and a password. With these they can store their data and information. All that the agent needs is a computer, a printer, a scanner and a good Internet connection. When he gets a form and a cheque, he scans both and the images, as they are being scanned, reach FUNDSNet. Since FUNDSNet is a subsidiary of Cams, it can, therefore, also accept MF applications and attest a time stamp on the application. 

The advantage with this facility is that if the distributor sends in an application at 2.59 p.m., he can still get the same day’s NAV. (The cut-off time for accepting MF applications is 3 p.m., after which the next day’s NAV is applicable). So, with FUNDSNet, the agent doesn’t have to go to the local R&T’s or MF’s offices before the cut-off time to submit the application. For collecting cheques, FUNDSNet has a tie-up with HDFC Bank. 

All records of an agent’s clients, subse­quent transactions, additional purchases, switches and redemptions are stored on the FUNDSNet servers and are accessible by agents. Data maintained on this plat­form is password-protected. 

There are several online tools and calcu­lators also available using which agents can bring out complex reports for their clients. So, the agent doesn’t need to invest in software to handle client information. NJ Fundz Network. Agents who join the NJ platform become NJ Invest’s sub-bro­kers. This platform does not allow scan­ning and electronic dispatch of applica­tion forms. The rest of the process is simi­lar to FUNDSNet’s although the tools offered by the two platforms may differ. 

The advantage with NJ is that it provides schemes from all MFs unlike FUNDSNet which offers schemes only from the 17 MF houses that are serviced by Cams. NJ also has a training program for new recruits and assists them in getting the mandatory Amfi certification. NJ’s platform also offers sophisticated tools that absolve the agent of the need to maintain a full-fledged back-office replete with systems and staff. “We help develop an advisor’s business and train him to handle clients. It is more of a business development platform,” says Jignesh Desai, joint managing director, NJ India Invest. 

Reducing costs 

The existing platforms are more attuned to agents’ needs. A more wholistic plat­form would be able to cut down paper work, make transacting easier, and reduce costs. India’s latest MF platform, iFast, is a step in this direction. It offers schemes in the form of a Portfolio Management Service (PMS). Whenever you wish to invest, your agent will collect your money and invest the entire amount in Deutsche Asset Management’s PMS (DeAM Wrap Portfolio), a division of Deutsche MF which is partnering iFast. 

As against a discretionary PMS where one common portfolio caters to several PMS investors, this is a non-discretionary portfolio where each investor would be able to invest in a unique bunch of schemes across MFs. You need to give only one cheque to DeAM PMS and fill only one form. Depending on the advisor’s choice, DeAM will invest across schemes. 

Apart from the modalities, iFast also dif­fers from the other two platforms on its cost structure which hinges on advisory rather than on sales. So, with iFast, if you want to invest in, say, five schemes, you will not have to pay entry loads on all of them. You can pay a consolidated amount (0.15-2.50 per cent) as the entry load. No entry load is charged on switches though the exit load is applicable. Apart from this, there is the agent’s annual fee of 0.5-1.5 per cent of your prevailing portfolio value. This would include a charge to your agent for using the iFast platform. iFast discourages frequent churning since switches are free and ensures that your money grows. 

In terms of solutions and tools offered, iFast is somewhat similar to NJFundz Network. However, with Sebi having abol­ished entry loads, advisory platforms such as iFast will gain an edge over the rest, eventually. The disadvantage is with iFast’s PMS structure. The minimum investment required is Rs 5 lakh, which could be a deterrent, and, being a PMS, it also attracts a higher dividend distribu­tion tax for all its investors (22.44 per cent, including surcharge and cess). Besides, if your agent gets logged on to iFast, he won’t be able to integrate your current portfolio with the schemes that you would be buying from iFast, for now. 

The next level

The mother of all platforms, the Amfi MF trading platform, aims to remove most of your troubles of investing in funds. Although the Amfi committee refused to comment on how the platform and its modalities would work, sources close to the development say it would be Internet-based where agents would be able to buy and sell units on an investor’s behalf without leaving their offices. 

Sources also say that a tie-up with National Stock Exchange terminals (78,000 at present), is being contemplat­ed. This way brokers would double up as MF agents. Ultimately, the Amfi trading platform aims to switch to a system where investors would have to fill just one form and give one cheque, and would receive one account statement, much like a demat account, irrespective of the number of schemes they invest in. This platform has Sebi’s blessings and is currently being developed by Amfi, an industry body. Sources claim that on account of this, Amfi would hold some ground in convinc­ing Sebi to bring in sweeping changes in its MF guidelines to ensure that the plat­form does not result in duplication. 

Take, for instance, a common account statement. Although all three existing platforms allow agents to get a common account statement for their investors, the latter still continue to get another set of account statements from all their MFs. The present guidelines require all MFs to send statements to their investors. 

Although with iFast, you need to fill just one form and submit one cheque for mul­tiple MF investments, the PMS structure and lack of integration of new and exist­ing portfolios are not user-friendly. Further, though FUNDSNet allows your agent to scan and transmit your forms and cheques, you still have to hand over the physical forms and write out cheques. 

Things would change once Amfi’s plat­form goes live. Paper work, and, therefore, cost, are expected to go down. Also, once transactions take place online, advisors would be able to focus more on giving advice and less on transacting and data maintenance. To an extent, the changes are already starting to happen for small-time advisors who are unable to set up their own infrastructure. But, once the Amfi platform gets launched, transacting in MFs would become much easier and penetration would get a further boost.