Myth 2: Investors will need demat accounts for mutual funds
A corollary to the above myth is that every mutual fund investor will be required to open and maintain a demat account in order to be able to invest in mutual fund schemes. This, also, is not true. At least, nothing in the SEBI circular could lead one to this conclusion.
An investor who wants to invest in mutual funds through his stockbroker may need to have a demat account. The SEBI circular also states that existing mutual fund units can be converted to the demat format as used by the stock depositories. That is, if you choose to conduct all your mutual fund transactions through your broker, you may bring in their existing non-depository registered units for consolidation in one place. All this is true. But this does not, however, mean that this would be the only place to hold the units or a demat account would be mandatory. You would still be able to transact in what would then have become “old-fashioned” ways.
SEBI’s announcement is primarily a move towards more inclusiveness. Mandating demat accounts for mutual fund investors would achieve the opposite effect, and clearly, that is not the case.
Myth 3: This will be the only channel for mutual fund investments
Another myth is the exchanges will become the only channels for investing in mutual funds. Again, this is untrue. Mutual funds will continue to be available through advisors, banks, online platforms that do not require a demat accounts as well as from fund houses directly.
Of course, how the future landscape is going to evolve is the subject of some interesting speculation. While all channels will be allowed and available, will the exchange channel become the most dominant of them all? Only time will tell.
Read: Review - ICICI Advantage Deposit Scheme
Myths apart, there are of course, a couple of real possibilities as a consequence of this announcement. These are the potential outcome:
Positive outcome: This will bring about easy consolidation of your holdings in one place. Right now, your mutual fund units are potentially scattered between four different back office operators of the mutual fund companies. When you start trading through exchanges, all your units will be available in a consolidated fashion in their depository account. This facility is currently available only to those of you who use online mutual fund investment platforms. One caveat to this though, is that it is not clear right now if all the mutual fund schemes will be made available through exchanges. If they are not, and if an investor wishes to invest in a scheme that is not available, a consolidation will not be possible.
Negative outcome: Mutual funds, as a class of product, are not stocks, and should not be approached like stocks. Mutual fund schemes are medium-long term instruments and are not to be traded regularly. If a broker starts pumping and dumping schemes with their clients like they are stocks, they will be doing a disservice to the market.
To summarise
While the SEBI announcement is largely a positive step made towards making mutual funds widely available to investors in India, we should understand it in perspective of the larger investor-friendly measures that SEBI has been taking over a course of time.
Also read: Investment myths debunked
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