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The changing face of Mutual Funds

Published on Thu, Jan 10, 2008 at 14:29 | Source : Moneycontrol.com

Updated at Mon, Jan 14, 2008 at 16:23

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Mutual Funds are yet to become the most preferred investment avenue for investors. Bank FDs and Insurance (nowadays especially ULIPs) still enjoy much more investor confidence than MFs.

This is quite surprising given the fact that MFs are any day a much better investment product than either Bank FD or Insurance. Be it in terms of convenience, flexibility, tax-efficiency, diversification, professional management, transparency, low-cost, etc. MFs score much higher on all counts.

Lack of investor awareness appears to the main reason for this anomaly and with time, as people start appreciating the benefits of MFs, this situation should correct itself. Hopefully this happens soon, as meanwhile the ordinary investor is losing a lot day-by day.

Meanwhile, SEBI also has been at the forefront to make MFs a better and better product. Three key announcements this year are likely to increase the attractiveness of MFs.

No-load for direct investors
As you may be aware, MFs usually charge an entry load of 2.25% for investment in equity funds. With effect from January 4, 2008, this entry load will be waived off for those investors who do not use the services of the distributors and instead invest directly by submitting their application at the AMC's office/Investor Service Centres or Online through the internet.

This is good news for investors.

But beware. There are more than 350 equity MFs in the market today and many more are being launched regularly. Therefore, it is not easy for a lay investor to choose the appropriate funds. As has been seen in the past, there is big difference in the returns from the top-performers and the laggards. Therefore, a wrong choice can seriously harm one's wealth creation efforts.

Hence, one should opt for direct investment only if one is a very knowledgeable investor. If not, it would be prudent to

Either first go for a fixed fee-based financial advice and then invest yourself based on the advisor's recommendations; or
Avail the services of a distributor if, besides advice, you also need someone to deposit the application forms/redemptions/switches etc.

Real Estate Investment Trust/Mutual Funds
Just as with equity, there is no denying the wealth creation potential of real estate. Hence, investment is real estate is definitely a must.

But today, investing in real estate is beset with many problems:

One needs a fairly large corpus - running into lakhs - to invest in just one property. This is not always easy. Moreover, even if one can manage it, the portfolio usually becomes lop-sided.
The transaction costs such as registration etc. are quite high
The procedure for buying and selling is quite cumbersome and time-consuming
Cases of unclear title/litigations and encroachment are common
Time and money is involved in maintaining/renting/leasing the property

Just as equity MFs have made investing in equity markets better, simpler and safer than direct investment on account of professional management, diversification, low entry amounts etc.; real-estate MFs/investment trusts will also bring about similar revolution in investment in real-estate by solving the above problems.

SEBI has recently announced the draft guidelines regarding Real Estate Investment Trusts (REITs), which are expected to be framed soon into final guidelines after getting the feedback from the experts and the public at large. One may also expect the guidelines on Real Estate MFs.

Unlike some of the real-estate schemes launched recently, which primarily invest in equity of real-estate companies, these funds will also directly invest in real estate (apart from the equity of listed and unlisted real-estate companies). They will, therefore, also earn lease rentals by renting out the property and/or capital appreciation of the property.

PAN and KYC norms made compulsory
PAN Card is mandatory for all investments from Jan 1st and KYC (Know Your Customer) norms from Feb 1st. Under KYC norms, investors - who want to invest more than Rs. 50,000 - have to give proof of their identity (which anyway is available through the PAN card) and proof of residence. This is under the Prevention of Money-Laundering Act.

While many of us may find this irritating, one must appreciate the fact that this is going to bring in more transparency into MFs. Of course, no system is foolproof. But the greater the transparencies, lesser are the chances of manipulation. For many who have suffered during various scams in the past, this is a welcome development.

Of course, given these restrictions, some may prefer to invest in ULIPs. But they would be paying a very heavy price for this and must, therefore, think twice before taking, what may seem to be the easy way out.

All in all these reforms/new product introduction are going to make investing in MFs that much better. We should, therefore, welcome these as a New Year gifts from SEBI and make the best of it.

- Sanjay Matai

The author is an investment advisor and can be reached at sanjay.matai@moneycontrol.com.

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