Over the past few years that the mutual fund industry has existed it has not grown as much as people would like you to believe it has. There are about 800 schemes – equity / predominantly equity schemes. If  you sort the folios PANCARD wise, I do not think there are more than 100,000 reasonably active mutual fund accounts. This in spite of the Industry saying that it has 40,00,000 active SIPs. I could be wrong. However there are some things which the regulator has done which look, well almost Quixotic. No I am not the first guy to use the word Quixotic in this context :).

1. Changing the load structure to be fully trail based: The industry tries telling the advisor..look at the trail. The adviser is wondering what if the trail is reduced / withdrawn? People with a trail income based model go for a toss?

2. Debt securities valuation: creating a new method of valuation could have been more gradual – this change will wipe out a few months nav growth.

3. The last nail: The buying and selling of mutual funds through broker terminals. This will mean the NISM ‘exam’ will be a mockery. If Sebi tells me they have the infrastructure to ensure that all people operating the 200,000 terminals pass the exam, I would be tickled. However that is not my problem. Too fast entry and exit into schemes will hurt the long term investor. Let us take the example of Hdfc Top 200. It has THE largest equity scheme and has approximately Rs. 8000 crores as corpus. If say the inflows on 3 days is Rs. 1000 crores, Rs. 1200 crores, and Rs. 800 crores – the fund manager WILL NOT BE ABLE TO INVEST – surely not in 3 days. Say he invests 500 crores in 3 days. The balance cash will take longer amount of time to be invested. Now the ‘trader’ oriented guy could take a daily view, a weekly view, a quarterly view…..how much cash will the fund manager keep to meet the redemption pressure? We can only guess.

Let us have a 2 minute silence for the investor..and in this case even the industry..

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  1. Subra, I must disagree. Let me tell you why.

    1. Fully trail based loads are not what SEBI wants to do; they really want a zero load structure so loads MUST go. They want investors to pay for advice, and so this is really a gradual move (if I can get 0.5% from investor, 0.5% from trail, my 1% is done and dusted, that’s less than the 2.25% I used to get but that’s ok)

    You also know that mutual funds are still paying upfront commissions and putting a 1 year exit load, so commission structures can give an advisor upto 2%. Reliance RSF-Equity was paying 1.5% recently as upfront comm apart from the trail! They have a

    2. Debt securities valuation was silly on the part of the MFs. Why straight-line the NAV when you know the market price is different? When there is an event where MF investors redeem a lot of cash, what will MFs do? Currently they go borrow from banks, but that window is going to be closed very soon by RBI, and the interest on that borrowing is charged to the investor anyway. If you have short term interest rates going up, the spike must reflect in debt mutual fund NAVs going down (what that will also do is give a better deal to new investors, so it evens out).

    3. Think about it – the structure you mention (getting 1200 cr. a day etc) will happen even now. It’s not required for “trading” – if trading is heavy the net buys and sells will even themselves out, so the net impact to the fund may not be much more than you see nowadays.

  2. In 15 years our mf, and broking penetration after removing all double counting is not more than 100,000 – and obviously an urban phenomenon. Will have to see how the brokers will change that. If there is a common settlement system (logically that is what should happen) – there will not be so much of creation and cancellation of units. One will have to see how that plays out.

    One the one hand there are people who get 30% CAGR, and on the one hand there are people who swear by so many mutual funds – why is the net collection not going up beats me. Lets hope.

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