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Stock brokers too will get to sell fund

Before investing through the new channel created for buying funds on stock exchanges, investors should understand its nature

As most mutual fund investors would be aware, it is now possible to invest in funds through a stock broker. Actually, that’s not true quite yet, but the system has been put in place on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Also, the broker through whom you are investing in funds must have people who have the required certification before they can get into this business. Still, one can expect these things to get sorted out sooner, rather than later. One reason why the exchange-based MF investments system has taken off so rapidly is that the Securities and Exchange Board of India (SEBI) is pushing hard for it, perhaps because the fund industry has proven to be either incapable, or unwilling, to create a unified digital platform by itself.

Anyhow, investors will now find that they have a new channel through which they can invest in funds. However, investors should be clear about what the new sales channel is and what it isn’t. This is a new route through which to buy funds. It makes fund investing easier for investors in smaller cities. It also makes investing easier for those who already have a depository account and have had their know-your-customer (KYC) certification done. From an industry perspective, it reduces costs and thus, makes it economic for the investor’s expenditure to be lower too. It also makes a new market addressable at a reduced expense.

But let’s talk about what the new channel isn’t. It isn’t one through which investors should expect to receive investment advice. I’m sorry to say this, but the culture of stock investing in India is one which would be lethal to sensible mutual fund investing. The world of a stock broker is one in which most clients hold investments for a few days and ‘long-term’ consists of perhaps, a month or two. A friend of mine has already had a call from his broker office who has enthusiastically described the methodology that they will follow when the business takes off: They will analyse mutual funds’ declared portfolios to see which stocks are likely to go up and then they will ask clients to take ‘tactical positions’ (his words) in the funds where they like the portfolio. This is a completely counter-productive way of investing in funds, but one which, I guess, would come naturally to someone whose primary skill is supposed to be stock selection.

Effectively, this broker has figured out that basically, funds are a new type of trading instrument where he’ll get about 0.5 per cent from the asset management company (AMC) rather than the pittance he gets as brokerage currently. This particular one didn’t even seem to be aware of the concept of exit loads. But I think it’s clear, under the new system, at least some stock brokers are more likely to be part of the problem, rather than part of any solution.

The principles of equity fund investing remains the same — invest gradually, invest for the long run in funds with a good track record and invest mostly in diversified funds. Just because they are being sold through a stock exchange’s system doesn’t mean that mutual funds have suddenly become suitable for active buying, or selling - even if newspaper headlines say that funds can now be traded on the stock exchange.