Short term pain for long term benefit

Whilst the above two measures may lead to escalation in cost to the investor,certain other announcements will lead to lowering of costs too. For instance,Sebi has mandated that all exit loads shall be fully credited to the scheme. Against this,the AMC can however charge additional expenses of 0.2 per cent to the scheme. This plough back of exit loads shall enhance the returns of the investors,though it may be offset partly by the additional expense of 0.2 per cent.

The regulator has also brought in the concept of the direct investor,also known as ‘do-it-yourself’ investor. Direct investors shall be a separate investor class in a scheme and shall be charged marginally lower expenses than those who wish to avail the services of a professional advisor or distributor. Though Sebi has not mentioned the exact quantum of the ‘lower expense ratio’,the move is likely to benefit investors who wish to plan and execute their investments themselves.

In another significant move to make mutual funds accessible to more number of people,Sebi has allowed cash transactions (investment as well as redemption) up to R 20,000. This shall enable people who don’t have bank accounts and PAN,to invest in mutual funds.

Another move that can have a significant impact on the returns of investors is the capping of transaction costs to 0.12 per cent in case of cash markets and at 0.05 per cent for Futures and Options market. With the expenses being capped,any transaction costs over and above the limit shall have to borne by the AMC. Naturally,this would lead to lower churning of portfolios and hence lower costs. The flip side of this step is that it discourages active portfolio management. Active portfolio management helps the portfolio manager generate alpha even when markets are range bound. In absence of this,returns to investors may suffer in range bound markets.

In order to curb mis-selling and protect the interest of the small investor who comes into the fold of mutual funds as a result of these steps,Sebi has included ‘mis-selling’ as a ‘fraudulent and unfair trade practice’ under Sebi regulations,which means that instances of mis-selling shall now carry harsher penalties.

On the whole,the announcements are aimed at increasing the reach of MFs among the masses as a vehicle for mobilising household savings into more productive sectors (capital markets) instead of less productive areas (gold and property) for the growth of the economy. This may increase the costs to investors marginally,but also brings with it higher access as well as better returns in the long term.

Author is MD,Bajaj Capital