Seamless MF Trading On Its Way

Trading in funds involves a lot of paperwork. But, it is set to become as simple as trading in shares

New vs Old

• Only agents and distributors can use the present systems. The new one could allow retail investors to circumvent one level and log in directly into the system to transact
• At present, investors get integrated statements from their agents and also individual statements from fund houses. This is a duplication of sorts. The new system will probably aim towards one statement only
• As of now, paperwork is still required—forms and cheques for each transaction. The new platform may reduce this by keeping most things online
• With more transactions online, the reduced paperwork could lead to lower costs
  As of now, advisors spend a lot of time on transactions and data management. With things going online, focus will be more on advisory

Isn’t it ironical that when you need to invest in, say, five different mutual fund (MF) schemes, you need to submit five forms and five cheques, but when you want to invest in equity shares of five companies, you either phone your broker or log on to the Internet and complete your transaction? You get a consolidated account statement of all your equity holdings from your depository participant (DP), but get statements from as many MFs as you have invested in.
Wouldn’t it be easier if MF transactions could happen as they take place for equity shares? Thanks to the Securities and Exchange Board of India’s (Sebi) chairman Chandrasekhar Bhaskar Bhave, the Association of Mutual Funds of India (Amfi) has appointed a committee of six MF officials to devise a platform for trading in MF units. The objective is three-fold: to make buying and selling of MF units less cumbersome, to increase penetration of the product by encouraging participants across India, and, subsequently, to reduce costs.
MF platforms are not entirely new in India. Three platforms already exist, one of which was launched recently. MF distribution and transacting through dedicated platforms promises to be the next big wave in the industry.

What is an MF platform?
Ideally, MF platforms are a common meeting point for MF houses, agents and investors. What you get to see on a website has a whole machinery working at the backstage that integrates your data and investments and channelises it to appropriate partners. Typically, agents have to open accounts on such platforms to be able to trade MF units on behalf of their investors. These platforms also double as an agent’s back office. So, he need not invest in sophisticated software or spend time manually preparing complex reports for clients. He can just use the ample tools available on the platform (like in a website), cull out statements of holdings with the latest net asset values (NAV) and other information about the portfolios, and send you newsletters or statements, or even answer any queries.

In countries like the US and Canada, platforms also enable investors to open accounts and trade in MF units directly, bypassing agents. Advanced platforms enable you to trade in MF units electronically and help eliminate, or, at least, minimise the paperwork.
MF platforms in India, however, are as yet not open directly to investors; only agents can access them. They are simply a link between agents and MF houses. NJ Fundz Network, launched in July 2003, is by NJ Invest, one of India’s largest MF distribution houses. FUNDSNet, launched in 2006, is by Computer Age Management Services (Cams), India’s largest registrar and transfer (R&T) agent. iFast (launched in May) is run by iFast Financial India, a Singapore-based entity that already has a successful platform in Singapore, managing assets of around $1.8 billion.

How does it work?
There are differences in the way the three existing platforms work.

FUNDSNet. When agents join the FUNDSNet network, they get a username and a password. With these they can store their data and information. All that the agent needs is a computer, a printer, a scanner and a good Internet connection. When he gets a form and a cheque, he scans both and the images, as they are being scanned, reach FUNDSNet. Since FUNDSNet is a subsidiary of Cams, it can, therefore, also accept MF applications and attest a time stamp on the application.
The advantage with this facility is that if the distributor sends in an application at 2.59 p.m., he can still get the same day’s NAV. (The cut-off time for accepting MF applications is 3 p.m., after which the next day’s NAV is applicable). So, with FUNDSNet, the agent doesn’t have to go to the local R&T’s or MF’s offices before the cut-off time to submit the application. For collecting cheques, FUNDSNet has a tie-up with HDFC Bank.
All records of an agent’s clients, subsequent transactions, additional purchases, switches and redemptions are stored on the FUNDSNet servers and are accessible by agents. Data maintained on this platform is password-protected.
There are several online tools and calculators also available, using which agents can bring out complex reports for their clients. So, the agent doesn’t need to invest in software to handle client information.

NJ Fundz Network. Agents who join the NJ platform become NJ Invest’s sub-brokers. This platform does not allow scanning and electronic dispatch of application forms. The rest of the process is similar to FUNDSNet’s although the tools offered by the two platforms may differ.
The advantage with NJ is that it provides schemes from all MFs, unlike FUNDSNet, which offers schemes only from the 17 MF houses that are serviced by Cams.
NJ also has a training program for new recruits and assists them in getting the mandatory Amfi certification.
NJ’s platform also offers sophisticated tools that absolve the agent of the need to maintain a full-fledged back-office replete with systems and staff. “We help develop an advisor’s business and train him to handle clients. It is more of a business development platform,” says Jignesh Desai, joint managing director, NJ India Invest.

Reducing costs
The existing platforms are more attuned to agents’ needs. A more inclusive platform would be able to cut down paperwork, make transacting easier, and reduce costs. India’s latest MF platform, iFast, is a step in this direction. It offers schemes in the form of a Portfolio Management Service (PMS). Whenever you wish to invest, your agent will collect your money and invest the entire amount in Deutsche Asset Management’s PMS (DeAM Wrap Portfolio), a division of Deutsche MF which is partnering iFast.
As against a discretionary PMS, where one common portfolio caters to several PMS investors, this is a non-discretionary portfolio, where each investor would be able to invest in a unique bunch of schemes across MFs. You need to give only one cheque to DeAM PMS and fill only one form. Depending on the advisor’s choice, DeAM will invest across schemes.
Apart from the modalities, iFast also differs from the other two platforms in its cost structure, which hinges on advisory rather than on sales. So, with iFast, if you want to invest in, say, five schemes, you will not have to pay entry loads on all of them. You can pay a consolidated amount (0.15-2.50 per cent) as the entry load. No entry load is charged on switches though the exit load is applicable. Apart from this, there is the agent’s annual fee of 0.5-1.5 per cent of your prevailing portfolio value. This would include a charge to your agent for using the iFast platform.
iFast discourages frequent churning since switches are free and ensures that your money grows. Thus, with Sebi having abolished entry loads, advisory platforms such as iFast could get an edge over the rest, eventually.
In terms of solutions and tools offered, iFast is somewhat similar to NJFundz Network. The disadvantage is with iFast’s PMS structure. The minimum investment required is Rs 5 lakh, which could be a deterrent, and, being a PMS, it also attracts a higher dividend distribution tax for all its investors (22.44 per cent, including surcharge and cess). Besides, if your agent gets logged on to iFast, he won’t be able to integrate your current portfolio, at present, with the schemes that you would be buying from iFast.

The next level
The mother of all platforms, the Amfi MF trading platform, aims to remove most of your troubles of investing in funds. Although the Amfi committee refused to comment on how the platform and its modalities would work, sources close to the development say it would be Internet-based, where agents would be able to buy and sell units on an investor’s behalf without leaving their offices.
Sources also say that a tie-up with National Stock Exchange terminals (78,000 at present), is being contemplated. This way brokers would double as MF agents. Ultimately, the Amfi trading platform aims to switch to a system where investors would have to fill just one form and give one cheque, and would receive one account statement, much like a demat account, irrespective of the number of schemes they invest in. This platform has Sebi’s blessings and is currently being developed by Amfi, an industry body. Sources claim that on account of this, Amfi would hold some ground in convincing Sebi to bring in sweeping changes in its MF guidelines to ensure that the platform does not result in duplication.
Take, for instance, a common account statement. Although all three existing platforms allow agents to get a common account statement for their investors, the latter still continue to get another set of account statements from all their MFs. The present guidelines require all MFs to send statements to their investors.
Although with iFast, you need to fill just one form and submit one cheque for multiple MF investments, the PMS structure and lack of integration of new and existing portfolios are not user-friendly since it leads to increased paperwork, among other things. Further, though FUNDSNet allows your agent to scan and transmit your forms and cheques, you still have to hand over the physical forms and write out cheques.
Things would change once Amfi’s platform goes live. Paperwork, and, therefore, cost, are expected to go down. Also, online transactions would help advisors focus more on giving advice and less on transacting and data maintenance. To an extent, the changes are already starting to happen for small-time advisors who are unable to set up their own infrastructure. But, once the Amfi platform gets launched, transacting in MFs would become much easier and penetration would get a further boost.

Source: http://www.outlookmoney.com/article.aspx?250505

No Longer Mutual for the Middleman

SEBI’s ruling on mutual funds will bring in new models of distribution and
eventually make the industry stronger

From August 2009, the Indian mutual fund industry will change its distribution model under an order from the Securities and Exchange Board of India. The regulator has done away with entry load for schemes. This will cause a lot of turmoil for all three parties involved: Mutual fund companies, investors and the distributors who handle 90 percent of the transactions.

How will the industry change?

SEBI wants the industry to follow the model practiced by UK, US and other European countries. This means the investor can decide the amount of advisory fees that distributors receive. So, the distributors will not get the 2.25 percent on every transaction that they now put through. This means there is no incentive for distributors to sell mutual fund products, unless the investor agrees to pay them separately. Many distributors say that if the commission is removed, they will switch over to selling insurance products where the commission system is intact. In order to survive, they will have to scale up and become advisors. They will be in direct competition with banks to sell mutual funds. Banks hold an advantage since they know the financial status of customers. “This is a transformative change for the industry in India. Now distributors will have to become a complete finance advisor and help investors in giving financial solutions,” says Sourab Tripathi of the Boston Consulting Group.

Why are tier III towns so important?

Until now the top eight cities accounted for 80 percent of the mutual fund markets. Distributors never tapped tier III cities. But, as the market shifts from a fund-based module to a fee-based module, they will have to re-think their strategy. Distributors will now offer annual plans and charge fees accordingly and to increase their business they will be forced to get more investors under their fold than concentrate on the funds of the same investors. In spite of all the initial problems that will be created by this move, over the longer term, it will only benefit the industry.

What models will emerge in the future?

Mutual funds will be sold through four different channels. There will be a basic discount broker model or a courier boy model. Here, the distributor will simply act as the postman. People with knowledge of mutual funds will use them but pay only a very small fee. A further extension of this model will be a “Do it yourself” model through the Net which could charge around one percent on the total invested amount. The other two models will be slightly at the higher end, offering advisory services. These could be the next door independent financial advisor who could charge the investor around 1-1.5 percent while the top-end model will belong to banks which will charge closer to 2 percent. Even banks will not be able to charge high fees as the banking customer will become savvy.

Source: http://business.in.com/article/briefing/no-longer-mutual-for-the-middleman/2552/1