MUTUAL FUND TRANSACTIONS OVER STOCK EXCHANGES

NSE finally launching transactions on 30th November, 2009 after SEBI allowing Indian Stock Exchanges about the same. We wish to clarify certain points about the new system.

In the essence, SEBI Circular says if you are looking to invest in mutual funds, you could get it done through a stockbroker also. Presently, Investors were having these points for transactions:

Point 1: Going directly to a mutual fund house
Point 2: Giving an application form to a distributor (an IFA or a bank)
Point 3: Using an online investment platform

So, now NSE Terminals are new Transaction Point in IndiaThis is significant development. With the abolition of entry load, and the consequent decreasing of distributors (See our article No more Hawkers in the street), SEBI was looking to increase the avenues available to individuals to invest. Also, mutual fund companies or their processors do not have offices in significant parts of the country.

With the introduction of new system, investors should clarify themselves about certain points, which are as follows:

Units of Mutual funds can now be traded - wrong concept
There is no change, Investors will be investing or disinvesting Units from Mutual Funds Companies. These NSE Terminals will be simply additional transactions points. Keep in mind Indian Mutual Units (Except ETFs and some Close ended schemes) are not tradable.

1. For open-ended mutual fund schemes - which are the dominant kind of retail investment instruments - investors will continue to buy units from the mutual fund house and redeem it from them as well.
2. There will be no "price discovery" - that is, the market or exchange will not determine the price for the mutual fund units. The NAV will continue to be calculated at the end of the day by the mutual fund houses.

Units of Mutual funds will continue to be bought and redeemed from the mutual fund house, and will be done at the applicable NAV as it is being done today.

Investors will need demat accounts for mutual funds - not necessarily

The ongoing system of Units in separate Statement will continue. Hence, it is not necessary to have a demat account.

An investor who wants to invest in mutual funds through his stockbroker may need to have a demat account. The SEBI circular also states that existing mutual fund units can be converted to the demat format as used by the stock depositories. That is, if you choose to conduct all your mutual fund transactions through your broker, you may bring in their existing non-depository registered units for consolidation in one place. All this is true. But this does not, however, mean that this would be the only place to hold the units or a demat account would be mandatory. One can continue with the existing system.

NSE Terminals will not be the only channel for mutual fund investments

As mentioned above, the existing system for investment and disinvestment will continue. So Investors should not that exchanges will become the additional point for investing in mutual funds. Mutual funds will continue to be available through advisors, banks, online platforms that do not require a demat accounts as well as from fund houses directly.

Every new development is always having both positive and negative features. Nothing is good or bad, our suitability matter.

Positive: This will bring about easy consolidation of your holdings in one place. Upto now, mutual fund units are scattered between different back office operators of the mutual fund companies. When you start trading through exchanges, all your units will be available in a consolidated fashion in their depository account. This facility is currently available only to those of you who use online mutual fund investment platforms.

Negative outcome: Mutual funds, as a class of product, are not stocks, and should not be treated like stocks. Mutual fund schemes are medium-long term instruments and are not to be traded regularly. If a broker starts pumping and dumping schemes with their clients like they are stocks, they will be doing a disservice to the market.

To summarize:: As mentioned earlier every new development always carry new features. We will keep investors informed about further new changes taking place. SEBI announcement seem to be a positive step made towards making mutual funds widely available to investors in all corner of country, we should understand it in perspective of the larger investor-friendly measures that SEBI has been taking over a course of time. It is duty of all of us to share and appreciate all good developments. On the other hands, we should not come under the trap of someone to start trading of units. Mind this Investment is always a long-term affair.

Source: http://www.indianmutualfundsonline.com/View/32.aspx