10 August, 2011

Has anything changed after the MF transaction fee introduction?

The entire MF industry has been waiting with bated breath for the new Chairman of SEBI to release them from the vortex of downward spiral, it has found since the past two years. Distributors have deserted the system as it was no longer remunerative enough. This resulted in too many orphan cases – investors who are not being serviced by anyone at all. No wonder that tens of lakhs of equity folios have been closed, in the past couple of years.

The abolition of entry load was positioned as the ultimate investor friendly step and media went to town, buying into this story hook-line and sinker. The simple fact is that for any market to function, one will need a functional system where all participants perform their function effectively and they all get their due. A win-lose relationship seldom works. It is a utopian idea that distributors will work for free. Distributors deserted the system as they were unable to charge a fee and the entire business had turned unremunerative.

Now, SEBI has brought in a fixed transaction fee for sale transactions - Rs.100 per existing folio and Rs.150 for a new folio, for investments of Rs.10,000/- or above. This does not cover any other transaction like STP, redemption etc. For SIP transactions (any amount / any tenure), it would be the same fee collected in three to four instalments. This has been ostensibly done to incentivize distributors penetrate the retail segment in small towns.

So, will this help? Let’s see. The awareness in smaller towns about MFs will be lower than in Metros and bigger cities and consequently more time and effort needs to be spent on an investor. After spending time, the distributor may still not get anything out of it – as the investor can invest direct, in which case there are no transaction charges and can also invest less than Rs.10,000/- through the distributor, without charges. This could pose a problem to a genuine distributor trying to suggest MF investments to potential investors.

Also, even if the distributor gets the charges, it is the same for Rs.10,000 or Rs.1 Lakh. It is fairly evident that an investor investing a few thousands will want a lower level of service as compared to another investing Lakhs of rupees. This fixed transaction fee will hence not be of much use, as, for a Rs.10,000/- investment in an existing folio would give the distributor 1%, whereas it will give 0.1% if the investment amount is Rs.1 Lakh. It is obvious that fixed charges have their limitations.

Additionally, it will open the field for unsavory practices too. There is nothing stopping a distributor from splitting a Rs.1 Lakh investment into 10 new folios and earning a 1.5% transaction fee. Investors would not even know what is happening and will be saddled with a huge number of folios. This will increase the number of folios ( especially with investment of Rs.10,000! ) and will seem like a vindication of SEBI’s stand. But it may just be a simple break up of investments, as discussed earlier. It could also give rise to churning, to earn transaction fees. Those could be the unintended consequences.

So, who is going to benefit from this? Some distributors who are into real retail segment and who have not been able to charge a fee of any sort, will benefit as they will get some fee to defray their marketing expenses. The retail investors will also benefit to an extent as now the distributors will again become “available”. But this regulation is hardly a game changer and has as much positives as there are negatives. What actually happens on the street remains to be seen. Caveat Emptor still should be the guiding principle for the investors.

Authored by Suresh Sadagopan ; Published in moneycontrol.com on 9/8/2011

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