SEBI propose to make MFs into brokers is not a workable solution
Last week, SEBI had suggested that MFs should execute trades through their own broking outfits and not charge broking costs additionally to investors. Is this really a practical solution and would it
March 13, 2023
SEBI’s proposal to make MFs into brokers is not a workable solution
Last week, SEBI had suggested that MFs should execute trades through their own broking outfits and not charge broking costs additionally to investors. Is this really a practical solution and would it really add value to the MF investors?
has SEBI actually said?
SEBI has been
quite categorical that it does not want the mutual funds to put extra execution
charges on MF investors but this should be managed in-house. So, either the
broker can get execution done in-house like any prop desk, or it can absorb the
cost inside the TER or total expense ratio within the maximum limit
permissible. SEBI would prefer if mutual funds do their own execution or even
float a broking unit. Alternatively, they can get execution done outside, but
cost can be adjusted within TER.
birds with one stone
In fact, SEBI is
trying to hit two birds with one stone here. Firstly, there has been an earnest
attempt by SEBI over the last two years to reduce the cost of mutual funds and
absorb as much as possible within the TER. That would not force investors to
look at lower cost passive index funds to save on the cost. The other reasoning
is subtle. After the Axis MF fiasco, SEBI is concerned about mutual funds
farming out orders to the brokers as it is a recipe for front running and is
very hard to monitor or regulate. This would serve both the purposes.
surely has a point
In a sense, SEBI
is right on both counts. Let us look at the cost aspect. SEBI has prescribed
maximum TER for all mutual fund categories, but there are lot of costs outside
that. STT on management fees is outside this TER, incentives for promoting MFs
in small towns is outside TER and even brokerage paid for the execution is
outside the purview. In the final analysis, the cost to the investor is much
more than the TER indicates and SEBI is of the view that the TER should be made
as transparent and as inclusive as possible. Even on the front running side,
SEBI is right that farming orders gives inordinate power and clout to dealers;
and we saw the result at Axis.
Including brokerage costs as part of the TER may
need broker buy-in, but that may not be the difficult part. Investors still
have the choice of going to passive fund to reduce costs. The bigger issue is
asking mutual funds to set up or use their own broking outfits. Most of the
large funds already have their own stock broking outfits. Today, volumes are
typically distributed across brokers on the basis of service quality, stock
ideas and corporate access provided. What SEBI suggests will force MFs to trade
entirely through their in-house outfits. Apart from the cost aspect, the bigger
challenge is that the fund loses out on the essence of market intelligence.