A lot of well-meaning people are worried about the limited reach that the mutual funds industry has into small towns and villages. This is very true. Except for UTI, no other fund reaches out to more than the fifty or sixty largest cities or towns in the country. In many of these places, the fund's presence is through a front office operated by the registrar of the fund.
A few weeks back I was invited to a meeting of a SEBI initiative called the Securities Market Infrastructure Leveraging Expert Task Force. Among other things, this task force is looking into solving this reach problem by involving the securities depositories into mutual fund sales. The depositories apparently have a presence in around 250 cities and towns around the country, in the sense that these many places have at least one depository participant.
The idea seems to be that if it were possible to buy and sell funds through depositary participants, then one could have fund sales possible in such a large number of places, as well as solve the unrelated problem of late NAVs by having a trusted third party control the exact timing of fund flows and allotment. The exact nature of the transaction and the role — if any — that the existing registrar will play is a little unclear but I guess that can be worked out. This is an admirable idea and I feel it should be implemented as quickly as possible. It will enhance the basic infrastructure of the fund industry.
However, we must give careful thought to a couple of issues. One is that the changeover to such a system must not mean saddling the investor with higher expenses. This will take some doing but simply must be done. The depository will be providing a service that will not come for free. My guess is that the depositary may have to spend disproportionately more on fund investors because the average transaction size is probably smaller. Where is this money going to come from? I think it must be generated either from within the existing brokerage or within whatever the funds pay the registrars right now. Otherwise we will simply end up with yet another claimant to a cut from the investor's money.
The other issue is that one must fall into the error of thinking that problem of mutual fund's reach is going to be solved — even partly — by such measures alone. Bringing depositories into funds' transaction loop will be a critical infrastructural improvement but that's all it will be. Even today, what stops people in small towns and villages from investing in funds is not that the fund does not have a local office. At Value Research, we have subscribers to this magazine in places where all investing has to be done by registered post since the courier companies do not serve those places either. Investors source prospectuses and forms by post and send in cheques by post and get along quite well. They are able to do that because they have information and education.
This growth in reach and knowledge will only happen organically. Ten years ago, most funds reached four or five cities, today most reach 20 or 30 and many reach up to 50 cities. If the fund industry does a decent job of investment management and providing service then in five years they could be in a hundred locations and in ten, maybe everywhere. If they don't, then no magic wand of depositary participants is suddenly going to cause a revolution.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
