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Serving Milk In A Bar

Mutual fund products may be available through stock market brokers now, but there is a big question over their ability to serve investors properly

This editorial appeared in the December 15, 2009-January 14, 2010 issue of Mutual Fund Insight magazine. It is a reaction to the newly established system where investors can buy mutual fund products through stock market brokers.

Even though investors can now buy funds through stock brokers, I fear that in practice, this may be a little bit like trying to order a glass of milk in a bar. You may want the healthy option, but when the establishment is used to serving only the heady and intoxicating stuff, then that’s what they’ll try and serve to you. Brokers are a convenience for those who don’t have access to mutual fund advisors, but they are unlikely to be suitable advisors.

Don’t get me wrong — I’m not saying that the new system of allowing the stock exchange’s system to sell mutual funds is bad. It definitely expands the potential reach of mutual funds across the country. It also gives the mutual fund industry an electronic transaction platform, on which the industry itself has looked incapable, or unwilling, of making any visible progress. The exchanges’ network is said to extend to over 2 lakh terminals across 1,500 towns and cities. 

That sounds good on a brochure, 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’ is perhaps a month or two. A friend of mine has already received a call from his broker, 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.

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. Of course, 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.

I’m sure that there are stock brokerages that already have a fund business and, presumably, a system to advice investors on the virtues of stable, long-term investments. But I’m not counting on the phenomena becoming widespread. Ever since the new system has been announced, the media has used the word ‘trading’ for the new facility. Trading is a most unfortunate word to use in this context. Trading is the very opposite of what one should be doing in mutual funds. The principles of equity fund investing remain 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.