Good and bad times are going hand in hand for retail investors in mutual funds. While Sebi has stepped in with a slew of regulatory changes, bringing down the cost of investing significantly, incentives for the mutual fund distributor community has come down drastically as a consequence of these changes. This has left investors without the services of mutual fund agents. What will investors do? Help of financial advisors may be sought by high net-worth individuals. For others, other channels have to be explored.
There are two modes for retail investors to choose from – offline and online. The comparison between the two modes is easy. With the offline mode, the investor will be required to fill up forms and write cheques for every investment. Also, one will not get a consolidated view of investments. In the online mode, one can either go via demat/exchange route or via mutual fund websites that deal directly with mutual fund companies. Paperwork is one-time after which subsequent transactions can be made with a few mouse clicks.
Between the two online modes of investments, the comparison gets a little tricky. If an investor chooses to go via the exchange, he/she should have a demat account which comes with an account maintenance cost. The non-demat route, provided by some online service providers does not require an investor to have a demat account. However, it should be noted that mutual fund units are held in a digital (dematerialised) form regardless of the route chosen by an investor.
Consolidation services are available in both modes. However, in the demat mode, all the holdings of the investor (including stocks) are consolidated into one statement. This is beneficial, especially if an investor is an active stock trader too. Some non-demat service providers allow investors to maintain their separate demat account along with their mutual fund account, allowing a virtual consolidation. However, the two instruments (mutual fund units and shares) are maintained separately.
Many brokerages offer zero-cost trading for mutual fund units. Some non-demat service providers also provide zero-cost mutual fund transactions. However, brokerages are bound to charge for mutual fund transactions in the long run, just the way delivery-based share trading is charged.
The cost comparison can be better understood from a business perspective also. In the demat mode, there are five entities involved — broker, exchange, clearing agent, depository and registrar of mutual fund — apart from the investor and the mutual fund. In the non-demat mode, there are only two entities involved – the service provider and the registrar of mutual fund. The former will prove more expensive for an investor in the long run.
Hence, going online would be the best way. Between the two online modes, choose the demat mode if you are an active stock trader and would not mind the costs incurred in the long run.
Source: http://www.financialexpress.com/news/for-mutual-fund-investing-online-is-the-way-to-go/683163/0
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