The Securities and Exchange Board of India (SEBI) has opened a new window of opportunities for the Indian mutual fund industry by allowing online trading of MF units through stock exchanges. This move is intended to offer both investors and mutual fund houses a cost-effective and convenient way to trade in mutual funds. But this is not all; there are some questions that have cropped up regarding the usage of this facility. Let us deal with them one by one:

What is this trading facility?

The online mutual fund trading facility comes in the form of an electronic platform that acts as a transaction point for MF unit trading, now available at both the Indian stock exchanges – BSE and NSE. The important thing is it will exist along side the existing facility where one invests in MFs through distributors or fund houses directly.

How will trading of MF units take place?

It is important to note that trading in MF units will not be similar to that in stocks. In fact, there will be no trading or listing of units.  Investors can just place an order or submit application forms online to buy or sell MF units. Only exceptions are exchange traded funds (ETFs) and some close-ended schemes that are listed and traded based on real time quotes.

There is a lock-in period for fresh subscription. The lock-in period is equal to the time taken for the physical application to reach the back office of the asset management company. But there is no lock in in case of investors with demat accounts. The allotment and redemption of units would be determined by the NAV of the day concerned.

Looking for Demat Account: Click Here

What is the application process?

Firstly, investors need to open a client account with a stock exchange broker. They can then submit an application for buying or selling MF units with this broker. They do not need a demat account to use this facility, instead they can fill up the application form for the scheme they want to invest in and get units created in folio. Old investors can have their new unit purchases credited under their existing folio.

Is this platform open to all schemes?

All open-ended equity schemes (except index funds) and debt schemes wherein the investment is less than Rs. 1 crore can be traded on this platform while fixed monthly plans (FMPs), interval schemes and liquid schemes are kept out. Moreover, investors can only make amount-based purchases and not unit-based purchases.

What are the transaction features?

• Investors can apply for fresh subscriptions, additional subscriptions and redemptions through this platform.
• Systematic Investment Plans (SIPs) and switches from one scheme to another are not allowed.
• In case of a dividend-based scheme, investors have to choose from dividend payout and dividend reinvestment options only. There is no dividend sweep option.
• Transfer of funds or payment should be done in favour of the stock exchange broker an investor is registered with.

Also Read: SIPs – made simple!

How to apply for redemption?

In case of investors with demat accounts, redemption application has to be made in the format prescribed by the Depository Participant (DP).  Investors with no demat accounts need to submit the preprinted transaction slip that is provided with the account statement.

Since amount-based redemptions are not possible in this case, investors can apply for only unit-based redemptions. After redemption, the amount is credited directly to investors’ account – an account provided in the bank mandate or the one linked to the demat account.

How cost-efficient is this facility?

Investors purchasing MF units through the exchange-based platform will have to bear high costs due to the additional outlay of brokerage and demat fees. This could be particularly expensive for those who don’t have a demat account. They will have to shell out close to Rs. 800 for opening a trading account with the broker and starting a depository folio, besides a brokerage of 0.25-0.5 per cent.

Also Read: I want to open a Demat Account

On the other hand, investors investing directly through mutual fund web site will not incur any costs as entry load on MFs has been abolished. Brokerage in such transactions is on an average 0.5 per cent and demat account fee is around Rs. 500. In case they already have a demat account, there will be only brokerage charges.

In conclusion

Exchange-based trading platform is a facilitating mechanism aimed at expanding the reach of mutual fund houses. It is just an alternate avenue for allowing mutual fund transactions. As of now, the mechanism is not as versatile in terms of the actions that investors can take but enables them to perform the basic transactions. Moreover, the cost considerations also favour direct investing through investment portals of mutual funds. We expect improvements and modifications in the system with time and increase in popularity.

The general perception about debt mutual funds is that they are meant for risk-averse investors and provide a reasonable fixed income. This suggests that debt mutual funds are safe and secure, but that is not the case. Investments in these funds are also subject to risks. The main risk is in the form of interest rate movements, which can induce volatility in the fund returns. Moreover, volatility in some phases can be even higher than that of equity fund schemes.

On the other hand, debt mutual funds can prove to be an effective technique for cash management and portfolio diversification if entry in these funds is timed properly. In this article, we will analyse returns generated by different types of debt fund schemes over different time periods, and also find out what type of scheme to be used depending on the interest rate scenario in the economy.

Looking for Demat Account: Click here

Liquid Funds

Liquid fund schemes are the schemes that invest in money market instruments with the lowest average maturity, for example, ten days or a month. These funds provide returns, a little over bank savings account returns. True to their name, they are meant to provide liquidity to investors while ensuring higher returns than savings accounts. As per the latest SEBI guidelines, all securities in which liquid schemes invest should be less than 90 days in maturity. The returns of these schemes are primarily based on interest accruals. The performance of liquid fund schemes over the past few years has been tabulated as follows:

Source: AMFI, NSE, BSE

What we see here is the returns have consistently exceeded savings account returns as desired.  However, a downtrend has been witnessed in these returns due to the fall in interest rates since last September in the wake of monetary actions taken by the RBI after the global credit crisis. The reason to invest in this scheme is that the returns are again expected to rise as the RBI is expected to hike policy rates from the next financial year.

Also Read: Mutual fund trigger: Should you activate it?

Liquid Plus Funds

These schemes are an improvisation of the conventional liquid fund schemes. Even though they do not have a maturity restriction on their assets, they primarily hold assets with a maturity of less than one year. Returns are again mainly based on interest accruals but fund managers try to boost the returns by actively churning the portfolio and booking some capital gains.

These schemes hold some mark-to-market securities in their portfolio. Mark-to-market securities means the securities whose gains or losses have to be reflected in the profit and loss statement. These securities provide the extra boost to the returns. The performance of liquid plus schemes is condensed in the following table.

Source: AMFI, NSE, BSE

It is evident that the returns of liquid plus schemes are marginally higher than that of conventional liquid schemes. The higher returns are mainly on account of the marginally higher risk taken. These returns are expected to improve on account of expectations of rate hike by the RBI in the next fiscal.

Also Read: MF offer document: Reading between the lines

Short-term Funds

Short-term fund schemes are more prone to interest rate risks as compared to liquid and liquid plus schemes. These schemes primarily invest in assets with an average maturity of 2-3 years, most of which are mark-to-market assets. Returns are generated by means of capital gains as well as interest accruals, and are higher than that of liquid and liquid plus schemes. However, the higher risk also creates a possibility of negative returns for these schemes. Now let us see how these schemes have performed over a period.

Source: AMFI, NSE, BSE

The table shows that these schemes have performed poorly vis-à-vis liquid and liquid plus schemes due to the high levels of volatility observed in the short-term bond rates in the market. The key to earn good returns in the schemes is to time the entry and exit correctly.

Gilt Funds

These funds invest in government securities. They can have different maturities depending upon the risk appetite of an investor. Gilt funds can either be short term or long term. The higher the maturity profile, the higher will be the risk return profile of the scheme. The investment strategies adopted by these schemes are similar to that of short-term funds. The basic difference between the performance of these schemes and short-term funds arises from the fact that the underlying assets in these schemes, i.e., government securities are much more liquid than the underlying assets of short-term funds, i.e., corporate bonds. The average performance of both the long-term and short-term gilt funds is tabulated below:

Source: AMFI, NSE, BSE

The performance of these funds pales before that of liquid plus and liquid schemes. The reason is the presence of volatility in movement of rates of government securities. The period of sustained fall in rates was observed from September 2008 to March 2009. If we take isolated returns during this period, the returns will turn out to be very high. Going forward, with rates expected to rise, the chances of sustained positive returns are low. The entry and exit have to be timed in the short term to take advantage of any positive movement in the returns.

Conclusion

Debt funds are not completely secure; they also provide different risk and return profiles like equity funds. Returns in these funds are impacted by volatility induced by interest rate movement. These schemes provide good returns if chosen carefully by the investor. The returns can be maximised by timing entry and exit properly.