Transactions in mutual fund schemes could soon become as easy as those in stocks. Securities and Exchange Board of India (Sebi) is planning to make listing of all schemes mandatory. These will include all debt, equity, open-ended and close-ended schemes.
Settlement will also be in line with those in stocks, that is, settlement must be completed within two days of transaction (called T+2), instead of the existing T+3 format. “Sebi wants transactions in mutual funds to become just like stocks in the secondary market,” said a source familiar with the development.
The market regulator is working in association with exchanges and fund houses to iron out the technical aspects of such a system. According to the sources, a series of meetings have already taken place.
Last week, Sebi held meetings with bankers that act as MF distributors. At that meeting, they were asked to become members of exchanges for MF distribution. Banks have been given two weeks to respond. The meeting was also attended by stock exchange representatives and intermediaries.
The first step – launching a mutual fund platform at both the Bombay Stock Exchange (BSE) and National Stock Exchange – took place last November. The second stage, listing all mutual fund schemes at the exchanges and making the settlement procedure faster, is in the works. And the final stage will be launching new fund offerings through the exchanges.
However, Sebi’s decision has been delayed by a few problems. For one, there are over 2,000 schemes in the market. Then, there are listing costs. When listing of fixed-maturity plans (FMPs) was made mandatory last year, cost was an issue.
At present, the cost of listing FMPs depends on assets under management. The cost is Rs 16,000 for funds that have AUM up to Rs 100 crore, for the first six months. The cost of listing exchange-traded funds is the same. “The listing cost of schemes may be too high, especially for smaller fund houses. It should not be a big deal for large players,” said a source.
Trading of mutual funds at the exchanges has not really taken off. Monthly volumes on the BSE, the bigger player in this segment, rose from Rs 18.80 crore to Rs 78.85 crore in July. The reason: settlements take place directly between fund house and investor. That is, units of a mutual fund are deposited directly into the demat account of an investor.
When trading through the exchanges, things are different. In comparison, in the case of stock trading, the broker takes delivery of shares.
So, if the cheque of a mutual fund investor bounces, the broker may have to chase an investor. “It is this lack of control at the broker’s end that does not encourage them to aggressively promote mutual fund trading. We are looking at a process whereby units can be delivered through brokers,” said an exchange official.
|PAST & FUTURE
THE STORY SO FAR# Listing of schemes has started, but not mandatory
# Volumes so far have been minuscule
# Brokers not pushing mutual funds through exchanges the road ahead
# Listing will become mandatory
# Banks and distributors to take SE membership
# Settlement cycle to be two days of transaction
According to Sebi officials, the basic reason for listing all mutual funds is to give investors another option. Also, costs will come down further. “The stock exchange is used as an efficient order-routing system from the investor to the fund house. We are simply using exchanges as efficient couriers of orders,” said a Sebi official.
Industry experts feel that while it makes sense to list closed-ended and exchange-traded funds (ETF), listing open-ended schemes will not help expand the market. “Listing close-ended schemes, though they trade at a discount, is quite simple. The investor has an exit route,” said the CEO of a fund house. In the case of open-ended schemes, listing does not make much sense because the investor can exit at any time, at the existing net asset value.
“Both the earlier directives, investing directly with the asset management company at zero cost and through exchanges, will take time to work. The market has not really expanded manifold after their introduction,” said an industry expert.
Internationally, while closed-ended and ETFs are listed, open-ended schemes are not. However, unlike India, the number of investors in ETFs is very high.