Very soon, investors will be able to invest in mutual funds directly through the stock exchanges on their own and without the assistance of their distributors or Registered Investment Advisors (RIAs).
The Securities and Exchange Board of India (SEBI) has asked stock exchanges to allow investors to buy and sell mutual funds directly on their platforms.
With this move, the regulator has now ensured a level-playing field with the mutual fund industry's own official platform, Mutual Funds Utility, which was launched by mutual funds through the Association of Mutual Funds of India (AMFI) in 2015.
As a result, investors who wish to invest in mutual funds on their own through direct plans, can make use of MFU directly. The stock exchange platforms- BSE STAR MF (BSE Ltd) and NMF II - also offered direct plans. But there was a small limitation - direct plans on stock exchanges were available only to those investors who invest in mutual funds through SEBI-registered RIAs.
Just like how investors invest in MFs through distributors on exchanges, the RIAs would initiate a transaction. The investors would then get a weblink on their email which they have to click on, make their payment and complete the transaction.
SEBI's latest move now allows investors to come to exchanges directly, just as they could go to the MFU entirely on their own.
"This is expected to provide a level-playing field to exchange MF distribution platforms vis-a-vis MF utility," said Ganesh Ram, Head of BSE STAR MF.
CAMS - one of the largest registrar and transfer agents of the MF industry - also allows investors to invest in MFs without the use of any intermediary, distributor or RIA.
There are already platforms such as Zerodha, Groww and many others that allow investors to invest in MFs through direct plans at zero fee.
Will investors now switch over to the stock exchange platforms?
"We have to wait and see the impact of this latest move. But I think it is unlikely they will switch. When exchanges launched their government securities platform last year, that enabled investors to directly place their bids, our customers used our platform, not the one built by exchanges," said Nithin Kamath, CEO of Zerodha, one of India's largest stock brokers.
Kamath is confident that with the ease of transaction, better experience, support and a variety of products and services that firms like Zerodha offer, investors would not want to shift to the stock exchange platforms. Hopefully, the exchanges can expand the markets by bringing in new investors.
But there’s a small benefit that direct access to stock exchanges offer, perhaps to larger institutional and upper-crust high networth investors - the benefit of extended cut-off timings.
At present, and as per regulations, you could invest in an equity and a debt fund up to 3 pm to be eligible for the same day's net asset value (NAV). If you wish to invest in a liquid fund, the cut-off time is 1:30 pm to be eligible for previous day’s NAV. For liquid funds, the additional condition is that you also need to ensure that the money is deposited in the mutual fund's account before the cut-off time.
Some private firms like Zerodha, who route their transactions through the exchanges, have their cut-off times an hour early. Stock exchange platforms, on the other hand, offer the official cut-off times because they directly deal with the RTA - a mutual fund's back office. The private platforms deal with exchanges and therefore close their doors a bit early to give exchanges the time to collect their orders and send them to RTAs.
"The new direct access to stock exchanges will give some large investors the added flexibility to invest till the official cut-off times. Some large investors would appreciate this," said an industry insider on condition of anonymity. On the other hand, private online platforms that Moneycontrol spoke to, are confident that their customer experience would ensure that investors (their customers) do not drift away.
The big challenge in front of exchanges will be handling a mass base of investors. Although industry experts don't see a surge in direct plans as a result of opening its doors directly to investors, it may benefit a section of large investors who would want to invest as close to the official cut-off time as possible. In that sense, SEBI has created a level-playing field with the MFU platform.