If you invest in direct mutual funds but are too sceptical to create separate accounts on different fund houses’ websites for buying the fund units, then doing so via one of the digital platforms that enable these services is seen as the next best choice.
Such services, undoubtedly, give a great deal of convenience, thereby drawing investors to them regardless of the fact that their data gets exposed to these fintech platforms.
Although these platform are completely legitimate but when they also happen to offer other services of investment advisors or stock brokers, then — more often than not — they can make investors sign a common agreement meant for those investors who are seeking those paid services of advisory.
“It is observed that various SEBI-registered investment advisor/ stock brokers have been providing execution services in direct plans of MF schemes through their technology platforms/digital platforms. However, not all investors who are executing transactions in direct plans of MF schemes through these platforms are availing of any advisory/broking services,” says SEBI.
Experts welcome proposed regulations
Currently, there is no framework for such technology platforms to offer execution-only services in direct plans of mutual funds schemes and obtain data feeds with respect to such transactions.
“Hence, to ensure that ease of investment comes with adequate investor protection, a framework for working of these platforms may be the stepping stone towards strengthening the investors with the power of technology along with the ability to invest directly in MF schemes,” reads the SEBI's consultation paper.
Although it is too early to know what exactly will be the nuances of these regulations, but based on the consultation paper, financial experts have welcomed the SEBI's intent and proposed set of regulations.
There is a larger consensus on the opinion that the model is not sustainable and hence, there should be some regulations for the larger good of retail investors.
“This model of execution-only platforms is not sustainable. They get clients and then cross sell, otherwise no one does anything for free. But the larger question is what cost will the regulations accompany. Usually when some new regulations are introduced, they come with additional compliance, which means additional cost. And with technology, there is a tech-enabling cost too. So, it is to be seen how feasible it will be for these players to continue in this business going forward,” said Ankur Kapur, chief investment officer and founder of Plutus Capital.
At the same time, Amol Joshi, Founder of Plan Rupee Investment Services, says that any set of platforms coming under regulations is a good news.
“Although more details are yet to come, but my initial reaction would be this: any investment-related platform getting under SEBI’s ambit is always good news. It’s difficult for an execution-only platform to sustain year after year. But it’s not a new phenomenon. There have been some examples in the past where some closed the shop, and some changed their model. We hope the regulator will do things like background check of promoter etc so that only serious players enter this space,” said Joshi.
Nitesh G Buddhadev, founder of Nimit Consultancy says that once these regulations are in place, investors will at least have the regulator's door to knock at.
"This proposed regulation of EOPs for direct MF is in interest of investors. Today most platforms that offer direct mutual funds don't have the sustainable business model as they don't charge fees for this service and rely on cross selling other product to the investors. Also, investors who transact on this fintech platforms and who are not clients for their advisory/broking services do not have any recourse in case of an adverse event. It's a welcome move by SEBI as they are trying to strike a balance between the convenience and investor protection," said Nitesh G Buddhadev.
What has SEBI proposed?
The matter was discussed in the Mutual Fund Advisory Committee (MFAC) wherein it was proposed that a separate framework for Execution-Only Platforms (EOPs) can be introduced.
Following the feedback received from industry participants, it was found that SEBI has already enabled investors to directly access and transact in mutual funds on Stock Exchanges which have the necessary technology-based infrastructure and processes in place to facilitate direct transactions in mutual funds for investors investing directly.
Based on the feedback, SEBI has proposed the following framework for these platforms:
Approach 1: Work as an agent of investor and obtain SEBI's registration
Approach 2: Work as an agent of AMC and obtain AMFI registration
Approach 3: Obtain limited purpose membership with stock exchanges wherein these platforms will act as agent of investors.
Direct plans comprise 45% of total AUMs
It is vital to mention that the mutual fund industry has seen tremendous growth in the past decade and as on April 30, 2022, the assets under management (AUM) of the Mutual Fund industry stands at ₹38.04 lakh crore.
In a decade since the introduction of a separate plan for direct investments in MFs, investments through direct plans of MF schemes have seen enormous growth.
As on April 30, 2022, the AUM routed through direct plans of MFs schemes stands at ₹16.94 lakh crore, which is 45 percent of the total AUM, while the remaining is routed through regular plans of MF schemes.