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IN A move aimed at providing mutual fund investors more options to buy or sell units of mutual fund schemes, the Securities and Exchange Board of India (Sebi) allowed mutual fund schemes to be transacted through brokers of stock exchanges. This move is expected to reduce the transaction costs for investors compared with what they were paying before Sebi clamped down on distributor commissions.
The step is also a relief to many mutual fund investors, deprived of services from distributors, who have been selling lesser equity schemes because of lower incentives. In August, the market regulator banned mutual fund houses from charging entry load or initial fees that found its way to distributors. Sebi said, instead, distributors should collect commissions directly from investors.
The fee charged by brokers for buying or selling mutual fund units will be the same as that of shares, said leading brokers. "The fee for transacting mutual fund units is likely to be 0.25-0.50%, similar to the charge for delivery-based share transactions," said Motilal Oswal, CMD, Motilal Oswal Financial Services. This means, brokers could charge investors up to 0.50% buying and the same amount for selling. But there is lack of clarity on how additional costs such as securities transaction tax and stamp duty would be levied.
"However, the aggregate costs to go through a broker will be much lower than what it was to go through a distributor," said Rashesh Shah, CMD, Edelweiss Capital. In the period before August, investors were charged 2.25% as entry load. Mutual Fund officials said the biggest hindrance to the new system being a success is that the transaction through a stock broker can be done only by mutual fund investors with dematerialised account (form of holding shares electronically). "Investors will not be able to take advantage of this, unless they have a demat account...many mutual fund investors don't have demat accounts," said a top official at a private mutual fund. Also, there is lack of clarity on how will mutual fund investors be charged for their systematic investment plans (SIPs), where investments are made at fixed intervals for a specified period.
The move to enable transaction of schemes through stock brokers will likely give clarity to the 80,000-strong distributors community in India on how much should they charge clients for their services "It will give a mechanism for brokers and distributors to charge a fee to the client, which was not available earlier, where banks have an uneven advantage," said Rajiv Deep Bajaj of New-Delhi-based Bajaj Capital. Sebi said investors have an option of holding mutual fund units in the dematerialised form against the paper form currently.
"In case investors desire to convert their existing physical units (represented by statement of account) into dematerialised form, mutual funds/AMCs shall take such steps in coordination with registrar and transfer agents, depositories and depository participants (DPs) to facilitate the same," the market regulator said. Sebi added the disputes between brokers and clients would be handled by stock exchanges.
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