Dematerialization of Mutual Fund Units – Simplifying the Investment Process

For quite few months, Mutual Funds in India have witnessed investors’ friendly regulatory changes, thanks to SEBI.  Right from the ban of entry loads in Aug 2009 to facilitating transactions in mutual funds schemes through the existing stock exchanges infrastructure in Nov 2009, SEBI now allowed mutual fund investments to be held in dematerialized form. It means that investors will have the option to convert their existing mutual fund investments into dematerialized form and buy/sell units through stock exchanges.

Background

With the removal of entry loads, SEBI intends to bring an advisory model where the intermediary charges a fee directly to the investors for providing advisory services to them. This reduced distribution incentive for distributors who found difficult to serve customers in far-flung areas or tier-3 & 4 cities. With this intent to provide mutual fund services to every nook and corner of India, SEBI decided to utilize the existing stock exchange infrastructure for mutual fund transactions.

Dematerialization of Mutual Fund Units

1.       Process

·        If you are an existing demat account holder, you can submit a Conversion Request Form (CRF) from your DP and submit the fully filled CRF form along with the Statement of Account to your DP. After due verification, the DPs will co-ordinate with the Asset Management Companies (AMC) and their Registrar and Transfer Agents which in turn after due verification
will credit the mutual fund units to your demat account.

·        If you are not a demat account holder, you will require to open a demat account with a DP before you can convert existing mutual fund units in demat form.

2.       Subscription of Units

Investors can subscribe to Mutual Fund units through their Stock Broker using the Stock Exchange platform. Upon subscription, the AMC/RTA will credit the mutual fund units to your demat account.

3.       Redemption of Units

Investors can redeem their dematerialized mutual fund units through two different modes. They can submit Redemption Request Form which in turn will send to the AMC/RTA after due
verification. The AMC/RTA will verify the form and credit the maturity proceeds in the bank account available in the depository system.

Why should you convert Mutual Funds into demat form?

1.      Consolidation – Even you are holding mutual funds investments with a number of AMCs, say 10 or 20, you can view all the transactions in a single statement instead of managing and collection statement of accounts from all AMCs.

2.      Easy Monitoring – Once you have your holdings at one place, you will be able to monitor them effectively and can also analyze its performance in one go.

3.      Fast transactions – Having all Mutual Fund units in a demat account can allow you to buy/sell the units without any inconvenience. It can be done either through a phone call or an online instruction unlike in physical units where you need to sign the repurchase form with each
AMCs and submit it in their point of presence (PoPs).

Drawbacks

The holding of MF units in demat account will necessarily lead an additional cost, a cost charged by stock broker on maintaining the demat account along with transaction charges. Currently, all brokers are offering transactions on MF units at free of cost which they might abandon once the volume picks up.

The impact will be minimal for those who already have a demat account with DPs. The potential of dematerialization of mutual fund units nullifies the cost associated with the demat account. Once powered with the demat units, the convenience and ease of transactions will definitely overrule the process of managing transactions with different AMCs. It provides a single platform to transact across multiple fund houses and their associated schemes. This is one of simplified steps which will help in simplifying investors’ financial life. Moreover, dematerialization of mutual fund units will improve the documentation process.

Exchange Traded Funds (ETFs) Innovations – MOSt Shares M50 ETF

Global Journey
ETFs have travelled a long distance since its inception in 1993 in USA. It took 7 years (from 1993 – 2000) to get it widely accepted among investors. Once it drew attention from investors, it grew leap and bound; the global ETF assets has reached an all time high of US $ 1.03 trillion as on March 2010 from an estimated US $ 463 million in 1993, clocking a CAGR of 56 per cent. On US Exchanges, 11 out of top 25 volume leaders/stocks are ETFs. Some of the top volume leader ETFs is SPDRs, iShares MSCI Brazil Index, Ultra Short Russel2000 ProShares, etc. These ETFs account for 78 per cent of total volume out of top 25 traded stocks on US Stock Exchanges. It was less than 25 per cent 10 years back.


Indian Journey
Not very old in India, ETFs started its journey in 2001 after Benchmark AMC forayed into this unique proposition. Since then, the ETFs grew by leap and bound. The domestic ETF assets grew from Rs. 7 crore in 2001 to Rs. 3,203 crore as on May 31, 2010. However, the main course of action in ETFs got intensified in the recent bull period. Indian equities component of Global Emerging Markets ETFs account for US $ 5.5 billion of AUM while the domestic equity ETFs now account for US $ 0.5 billion. Overall, over the past year, around 20 per cent of the net inflows into the Indian market have come from ETFs, thereby, ETFs a very significant component of Indian fund flows.


Is ETFs good for investors?
The global historical data suggests that the fund managers have not been able to beat the benchmarks constantly over a longer period. In efficient market scenario, the active funds find difficulty in beating their benchmarks. So, it is always preferable for investors to look for a product which provide a decent return, at least comparable to its benchmark with bounty of other benefits such as tax efficiency, low expense ratios.
ETFs are pools of stocks, bonds or in a few instances other types of investments such as Gold that you can trade like stocks. ETFs tend to have very low annual expenses – much lower than the actively managed funds. Moreover, ETFs are high tax efficient i.e. they tend to minimize distributions, which will drive down your post-tax returns. ETFs are listed on stock exchanges and can be bought and sold like any other company share.


Product Innovations
Innovation is the key to success. For now, at least, all ETFs are an index fund which mirrors an index or a benchmark, unlike actively managed funds whose managers try to beat the market. There have been talk of companies bringing out actively managed ETFs, but so at least in India, it has not been manufactured. Currently, in India, the underlying for ETFs are Index, Sector, Money Market Instruments, Arbitrage etc. One more type to add in the basket of innovated products is actively managed ETF – MOSt Shares M50 ETF, the first of its kind in India, launched by Motilal Oswal Mutual Fund.
Passively-managed ETFs follows its index and invest in the same proportion as of its index while actively-managed ETFs follow their own fundamentally defined rules.