A new kind of mutual fund seller and a new set of rules

The story of how mutual funds are bought and sold in India has added yet another chapter. Last week, financial regulator Securities and Exchange Board of India (Sebi) mooted the creation of a new kind of fund-selling entity named Execution Only Platforms. Notably, these EOPs have come into existence first and are being recognised as a distinct type of entity afterwards, but more on that later.To understand this whole process and what it means to investors and the mutual fund industry, let’s see how we got here. Stage 1: Once upon a time (before 2009, actually), there were fund distributors. Originally, in the olden days of the Unit Trust of India and through the 90s, most of these were individual agents, much in the mould of insurance agents. The important thing is that these were agents of the fund company. Even as the selling industry corporatised through the 90s, the underlying model stayed the same. The investor’s money went to the fund company, which paid the agent a commission. Typically, at the time of investing, a certain amount of money was deducted from the invested amount. This was called the ‘entry load’ and went to pay the commission.Stage 2: In 2009, Sebi abolished entry loads, forcing funds to pay commissions out of their pockets. This decision implicitly recognised that the commission was a payment for a service the distributor rendered to the fund company. Distributors went through the motions to give advice, but the advice was tuned to maximise commissions. Since most of the commission was paid at the time of the initial investment, making the investor churn holdings was a huge malpractice. Stage 3: In 2013, Sebi forced all mutual funds schemes to start a ‘direct’ plan. In these plans, investors would interact directly with the fund company or its registrars. There would be no intermediary, and the expenses that the fund company charges for commission in the regular (non-direct) plan would not be charged at all. For the first time, there was the option of avoiding an intermediary and earning higher returns. ShowBlurbsAt the same time, Sebi forced a division between distributors and investment advisors. Distributors are agents of the fund company and are paid by the company. Investment advisers work for the investors and are (should be) paid a fee by the investors. The idea behind the entire structure is now self-evident. You can do three things: You can go to a distributor if you want complete hand-holding but don’t care about anything else. Or, you can choose an investment adviser, pay for advice and guidance and then transact directly. Or, you can do your own research and transact directly, which is the option that puts the maximum responsibility upon you but maximises your returns and minimises your cost. In the last two options, transact directly means either with the fund companies (online or offline) or with the industry-wide platform run by the Association of Mutual Funds in India (AMFI) – MF Central. ShowBlurbsThe fourth optionHowever, over the last three-four years, a new kind of animal has entered this zoo. These are businesses that are not advisers and not distributors either. They are running a digital service for investors to come and transact direct plans but not charging for it. The problem is that they do not fit into the intermediary types that the regulations allow so far, and they operate in a way that does not fit the regulations. Still, they have served a need and have become popular with investors.Sebi’s new regulations, which will take a few months to be implemented, create this new class of intermediaries that execute transactions for investors and charge a fee for it if they want. They will not offer advice or take any commissions from the asset management companies (AMCs). Certainly, the regulations should reflect what intermediaries are doing. However, it raises the question of what else these entities will do to sustain themselves when the funding runs out, but that’s a separate story.The writer is CEO, Value Research