THE Securities Exchange Board of India (SEBI) issued a circular recently that gave stock exchanges permission to transact in mutual funds. This terse two-page document has given raise to a host of speculations in both the investor community and among the industry players. Let us try to separate fact from fiction and see what could, in reality, be the possible implications of this announcement.
The SEBI circular was about…
The operative paragraph in the SEBI circular is as follows:
“Units of mutual fund schemes may be permitted to be transacted through registered stock brokers of recognized stock exchanges and such stock brokers will be eligible to be considered as official points of acceptance as per SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006.”
In essence, it says if you are looking to invest in mutual funds, you could get it done through a stockbroker. Until now, there were three avenues available to invest in MF:
Avenue 1: Going directly to a mutual fund house
Avenue 2: Giving an application form to a distributor (an IFA or a bank)
Avenue 3: Using an online investment platform
New avenue: Transacting in mutual funds through Exchanges
When the exchanges put SEBI’s permission in place and allow transacting in mutual funds, there will be one more way to procure and redeem mutual fund units. This is significant news, no doubt. With the abolition of entry load, and the consequent dwindling of the number of distributors willing to sell mutual funds to investors, SEBI was looking to increase the avenues available to individuals to invest. Also, mutual fund companies or their processors do not have offices in significant parts of the country. This move by SEBI will provide a mutual fund point of presence to these customers.
Having said that, it is important to dispel a few myths about what this announcement means:
Myth 1: Mutual funds can now be “traded”
This is probably the most popular misconception about the SEBI announcement. Several people are asking if they will be able to trade mutual fund units like stocks. As in, will they be able to buy and sell mutual fund units from/to fellow investors. This is clearly not possible.
1. For open-ended mutual fund schemes – which are the dominant kind of retail investment instruments - investors will continue to buy units from the mutual fund house and redeem it from them as well.
2. There will be no “price discovery” – that is, the market or exchange will not determine the price for the mutual fund units. The NAV will continue to be calculated at the end of the day by the mutual fund houses.
The only exception to this is closed mutual funds – schemes that are not available from the mutual fund house either for purchase or redemption. If you’d like to sell your closed mf units, you can do so in the exchange. This facility too, was not newly created by this SEBI circular; this was already there.
So, in summary, mutual funds will continue to be bought and redeemed from the mutual fund house, and will be done at the applicable NAV as it is being done today.
Next page: More myths and outcome
Illustration: Vaibhav Shirke
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