Mutual Funds : Agents or Stock Exchange?

When Sebi abolished the entry loads for all mutual fund schemes in August this year, it also removed the incentive for agents and distributors to sell funds. Expectedly, the inflows to mutual funds dropped by around 25 per cent as the vital link between the investor and the fund house was cut off.

The move to allow mutual funds to be traded on the National Stock Exchange (NSE) is an attempt to fill the gap. With over 2,00,000 trading terminals spread over 1,200 locations across the country, the NSE has a phenomenal reach. This, besides the ease of buying a fund from a broker without filling up an application form, makes it sound like an idea whose time has come.

However, buying and selling mutual funds through a stock exchange is not as simple as it is made out to be. For one, not all brokerages would be interested in extending the facility. The ones that do obtain the Association of Mutual Funds in India certification to sell mutual funds will not be trained to give advice. Selling mutual funds is far more complicated than selling stocks and derivatives. A small communication error by the operator who takes your order on phone at the brokerage could leave you saddled with the wrong fund. So, while you wanted the cumulative option of Plan A, you could end up with the dividend option of Plan B.

The problem doesn't stop here. A stock broker's livelihood depends on the volume and frequency of trading. Every time you buy or sell, he earns a commission. The more you trade, the richer he becomes. But the 'buy today, sell tomorrow' strategy is for punters, not equity fund investors, who should have an investing horizon of at least 3-5 years. Besides, the exit loads can prove ruinous if the investment is redeemed too early.

Don't be mistaken that this investing channel is without costs. One needs to have a demat account and a trading account with a broker. Opening a demat account may be free, but banks and brokerages levy an annual maintenance charge of Rs 300-500. Remember, this charge is levied even if you do not conduct any transaction during the year. So, it makes sense for someone who already maintains a demat account for stocks, bonds and exchange traded funds.

Then there is the recurring charge. Even if your broker doesn't charge a commission for buying or selling a fund, you will incur a cost of Rs 15-20 every time a fund is credited to or debited from your demat account. It's a small fee, but it can amount to a large proportion for someone who makes puny purchases worth Rs 500-1,000 every month. This is almost 1.5-4 per cent lost as demat transaction charges.

If you are going to pay up to 4 per cent as load, isn't it better to go through your tried and trusted agent who charged only 2 per cent?

Cost of buying a fund

• You need a demat account and a trading account. A demat account costs Rs 300-500 a year.
• Each time a fund is credited to or debited from a demat account, there is a Rs 15-20 fee.
• Not a cost-effective option for those who make small purchases worth Rs 500-1,000 every month.
• Greater chances of mis-selling as stock brokers are likely to goad people to buy and sell frequently.
• Stock brokers are not qualified to give advice on mutual funds. A small mistake can prove costly.

Source : Media