Why buying mutual funds from the exchange can be significant?
During the week, the regulator allowed investors to directly purchase mutual funds from the stock exchange. Many analysts have dismissed this move as being of limited importance but this could become much bigger in the days to come. Let us understand this move.
What the shift entails
This looks like a fairly simple shift but it could have larger significance in the days to come. Currently, individual investors cannot directly place orders to buy and sell mutual funds units on the stock exchange. These orders can only be placed by SEBI registered brokers and independent financial advisors (IFAs). Of course, there is a complex web of back end transactions that take place. The AMC gets the funds, the Registrar and Transfer Agent (RTA) ensures that the relevant units get credited and the clearing corporation of the stock exchange ensures that the clearing of these mutual funds goes through smoothly. We are referring to the two most popular online exchange platforms for mutual funds viz. BSE STAR MF and the NSE NMF2. The only concern was that since the trades were being route through brokers, they would only accept Regular Plans and not Direct Plans. As a result, individual investors ended up paying sharply higher TER to the tune of 125-140 bps. Now investors can just go to the exchange platform and place the order for purchasing direct plans to enhance returns.
Consolidation of holdings
One of the biggest advantages that this system will offer is the consolidation of assets owned by the investor. Currently, while equities and ETF reside in demat form in your DP account; people still prefer to hold mutual fund and bonds in physical form. This was largely because the Direct Plans were not available to individual investors. With the regulator making it mandatory, the brokers will have no choice but to allow the investors to purchase Direct Plans of mutual funds directly from the stock exchange. For an investor, it is more convenient to keep all assets in one place in electronic form. With Direct Plans available on exchange platform, exchange buying of MFs could take off.
Towards professional clearing
As investors move from buying MFs through brokers to buying on the stock exchange, the transaction risk is largely reduced. You have well capitalized clearing houses taking care of mutual fund clearing and settlement. This is much safer than leaving the float with the broker, as is the case now. SEBI may have thought of this measure as a first step to keep trading members doubling up as clearing members. If the MF experiment works, then the clearing corporations could handle all the clearing for the equities also. That could be a big step towards making mutual funds and equities a lot safer!
