The SEBI in its last board meeting agreed to permit individual investors to directly access the mutual fund platform on the stock exchanges. What does that mean for investors and what could be the larger implications? To begin with, it is likely to ease flows into direct plans of mutual funds because previously investors had to go through an intermediary platform to invest in such plans. We are here talking about investing via the exchange platform like BSE STAR MF which is available for brokers, intermediaries and independent financial advisors (IFAs) currently. Now even individuals can buy on the platform like stocks.
What the SEBI circular says
Post its last board meeting, SEBI in a circular allowed investors to directly buy and sell mutual funds through stock exchanges without going through stock brokers or mutual fund distributors. This applies to the stock exchange platform for mutual funds, which is currently driven by brokers. Of course, this will require a tweak in the current infrastructure so that regulator has directed exchanges, clearing corporations and depositories to set up the infrastructure required for the same. The move is likely to ease flows into direct plans of mutual funds. Currently, direct plans cannot be used in such broker purchases as the broker would not encourage a zero-brokerage plan. Now investors can even buy Direct Plans on the exchange platform as laid out by SEBI in 2013.
Directly access the exchange without intermediary
In the past, investors had to go through an intermediary platform to invest in mutual fund plans via the exchange route. Many of these avenues were free but came with hidden costs. For example, they rested on business models like cross selling of other financial products to direct mutual fund investors. Intermediaries are allowed to use the infrastructure of stock exchanges to facilitate mutual fund transactions for clients. SEBI allowed Mutual Fund distributors to use this facility from 2014 and RIAs from 2016.
The latest notification will permit stock exchanges like the BSE and the NSE to directly offer mutual funds to the public. The intermediation of brokers will not be required. It will certainly be a great step towards ease of doing business for the investors at large. In fact, the expectation is that this move might help broaden participation. Currently, AMCs also allow investors to invest directly in MF schemes through their respective websites but the take-off has been limited due to most investors being wary taking their own investment decisions.
Does it create conflict of interest for the exchanges?
That is a question that will increasingly be asked by the market intermediaries and the regulator may also have to think on those lines. The reasons are not far to seek. Stock Exchanges are a quasi regulator or at least a first-level regulator as SEBI calls them. This move will entail them having to set up customer facing teams and back office infrastructure. It is not clear how this will go hand in hand with their quasi regulatory status. If the exchanges have to spend on such infrastructure and Chinese walls, the apprehension is that direct plan expense ratios will go up because even the stock exchanges will ultimately have to recover their costs. This could push up costs on direct plans since most of the exchange intermediated flows will come through direct plans. That is something we need to wait and watch.
Stock exchanges could be the big beneficiaries
Apart from the individual investor who can now buy mutual funds on the exchange platform and hold in the demat account; the other beneficiary will be the stock exchanges. For them, it is an additional revenue stream. It will also provide a level playing field to mutual fund distribution platforms of stock exchanges compared to Mutual Fund Utility (MFU). Now stock exchanges will also share some pie of Do-it-Yourself (DIY) AUM (which has neither a distributor nor an RIA code). That is the pie that is rapidly growing and that is where both the retail investors and the exchanges could benefit from.