Exchange Trading of Mutual Funds in India
7 September 2010
In the last year and a half, the Securities and Exchange Board of India (SEBI) has taken a number of steps to develop the mutual funds industry in India. One significant move in this direction has been allowing trading of mutual funds at the country’s stock exchanges. After studying the feasibility of doing this in 2009, SEBI approved mutual fund transactions through stock exchanges in November last year. This was done to extend the convenience of the secondary market infrastructure to mutual fund investors who could earlier invest in funds only through the existing distributor/agent channel. India’s exchanges with a large number of trading terminals connected through numerous Lease Lines and VSAT terminals can reach investors in over 400 cities. Besides reach, exchange trading offers number of other benefits too: opportunity to invest in multiple asset class through a single (demat) account, aggregation of entire portfolio in a single place enabling easy monitoring and more efficient investment decision making, reduction of paper work and errors etc. Also the exchanges’ existing delivery vs payment process offers de-risking of settlement process and increases transparency. Following SEBI’s approval, the two Indian Exchanges, the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) started trading in mutual funds in November-December, 2009 (NSE: Mutual Fund Service System, BSE: StAR MF). Under the current arrangements investors would be able to deal in Mutual funds that have signed up with the exchanges and in the schemes which the fund houses have permitted to be traded at the exchanges. Out of 40 Asset Management Companies, around 20-22 have signed up with the two exchanges so far. SEBI is planning to make listing of all schemes mandatory. A look at the figures (see graph below) reveals this new channel for investing in mutual funds has not been very popular among investors yet. It can be noted in this context, average daily transaction value (sales+redemptions) for the overall industry during May-July, 2010, had been around 690 bn Rs, which makes exchange trading around 0.3% of total trading during the same period. The occasional jump (July) in trading value is more because of market fluctuations than investors’ preference for exchange trading: Industry Assets Under Management went down by 10% in July as compared to May, as a result subscription went up. Though it has to be acknowledged that of late, there has been a push from the fund houses to encourage investors to take the exchange route.
However, these are still early days for this new system. Moreover, since removal of entry load (distribution fee charged by agents to investors) in August, 2009, the industry has been in a state of flux with agents now focusing more on selling insurance products which have high distribution fees. To overcome this problem the fund houses have been trying a number of new distribution models in last one year for attracting new investors; but a clear pattern is yet to emerge. It can be argued with more investor education and awareness about the new technology channels and SEBI’s continuous push, exchange trading of mutual funds is likely to pick up in the future. Banks are a big player in mutual funds and the regulators’ urging banks to transact through exchanges may be one step towards achieving this. Another recent phenomenon is that many brokerages are placing orders through exchanges in the recent months. These all hold good promise for this new channel, however, its long term impacts are yet to be seen.