The new mutual fund rules will have an impact on how investments are made but will ultimately benefit investors, according to experts.
While there have been certain hitches in the implementation of the new mutual fund rules, they are aimed at investor protection, Vishal Dhawan, founder and chief executive officer at Plan Ahead Wealth Advisor; and Juzer Gabajiwala, director at Ventura Securities, told BQ Prime’s Niraj Shah.
“It’s to ensure that accidents of the types that happened earlier are prevented going forward,” Dhawan said, referring to pool accounts—where investors’ monies or securities are held—which were sometimes being misused.
The regulator came out with rules in October 2021 to prevent misuse of investor money and units. It stemmed from Karvy Stock Broking Ltd. allegedly borrowing money against client’s securities. The new rules, among other things, mandate that funds directly go from an investor’s account and also units should be directly issued to an investor.
Gabajiwala said the move brings “everything onto a level-playing field”. “Good that the money is going directly from the client’s bank account and the redemption is also coming directly into his account. So, even from a processing point of view, it becomes a bit easier for us.”
According to Gabajiwala, investors should not opt for new fund offers or NFOs without doing due diligence.
“But (wait) until you see a particular theme coming out, something which is different, something which is new and not the same old thing. Otherwise, money is just rotating from the previous schemes into the new schemes. That is something that people will need to be careful about,” he said.
Watch the conversation here:
Edited excerpts from the interview:
Let’s start off with the new rules around mutual fund investing. What has changed? Does it change the life of an investor?
Vishal Dhawan: The spate of circulars started around October 2021, where you had SEBI really step in on some of the challenges that emerged out of the Karvy issue that took place. Essentially, pool accounts—which are common accounts where investors’ monies or securities are held—were actually being used or sometimes misused, which is what SEBI wanted to control.
Effectively, what SEBI came out and did is said that if you are buying a mutual fund, we need to ensure that you as an investor, always have the money going from your account directly to the mutual fund scheme, rather than going into some in-between account, which is called a pool account that potentially gets allocated to different mutual funds.
Similarly, when there are units that are being issued, the unit should get issued directly to you as an investor, rather than going through any intermediate process. And the same process is going to be applied whether you are using a platform which is run by a stock exchange or a non-stock exchange.
Now, this whole process is very clearly aimed at investor protection. There may be certain hitches that have come up as this implementation has happened. The implementation was first set for April 1, it then got deferred to June and July, for non-stock platforms and stock platforms, respectively. It’s very clearly aimed at investor protection and to ensure that accidents of the types that happened earlier, are prevented going forward.
So, I would say some impact for sure because you might find that some of your SIP processes might have to go through a change.
If you are using some of the platforms where you were doing RTGS, for example, they may have stopped it temporarily. But, all in all, it’s a very investor-friendly step. You should deal with it knowing that this is good for you, though it’s putting you through a bit of pain.
Juzer, does it change the life of an investor? If so, how?
J Gabajiwala: It does. Vishal has summed it up quite well. There is a bit of differentiation in that the pooling is going to be done at the exchange level. So, the exchange is allowed to pool the funds. The investor would now make the payment to the Indian Clearing Corp. for any transactions which are done through the broker platform, which previously was coming onto the broker side.
We have not seen too much of a disruption. There have been glitches. With any new system, it is always going to be difficult. We have had a lot of investors also feeling that the previous thing was so easy. Why is this change being done?
But it brings everything onto a level-playing field. Good that the money is going directly from the client’s bank account and the redemption is also coming directly into his account. So, even from a processing point of view, it becomes a bit easier for us.
And they have even allowed the migration of the SIPs. All SIPs which were there have been reasonably and quite seamlessly migrated directly onto the exchange platform. SEBI has done a good move over there by allowing that migration. Otherwise, it would have been pretty chaotic. All in all, it has been handled pretty well.
It seems to me that it is for the better. There might be a few teething problems. It’s at certain levels on certain platforms, but largely, it should be beneficial and secure. That’s actually a good sign.
Vishal Dhawan: The two big things around security that have got enhanced is whenever you are removing money from your investment, let’s say you are doing a redemption, there is a need for two-factor authentication. That is going to help you get an OTP to either an email ID or a mobile number. And therefore, you can ensure that there is no unauthorized access happening to your investment.
On the other side, there is also a tightening of third-party investments. So, anti-money laundering that is such a focus globally gets more attention as well.
So, besides some process changes that are happening, there is actually a very big, positive move at the back-end to make things even cleaner than they already are.
New Fund Offers were shut for a while. They will now start coming. I already know of the White Oak Flexi Cap Fund NFO starting on July 12. There might be a few others too. What should investors do? Are there some NFOs which they should look out for? Is there something unique that you knew was in the pipeline but was held and will now come in? Can you share a bit about this?
J Gabajiwala: What SEBI had done is that when they took the circular which was (to be) implemented on April 1, and it got delayed to July 1, they actually put pressure on the mutual funds and told them that there will be no new NFO till the time the circular is implemented.
White Oak actually had to bear the brunt because that was the first scheme. They were just launching the mutual fund. So, for them the first scheme is going to get launched right now.
But (wait) until you see a particular theme coming out, something which is different, something which is new and not the same old thing. Otherwise, money is just rotating from the previous schemes into the new schemes. That is something that people will need to be careful about.
I can see a lot of things which could come up maybe on the debt side with interest rates going up. Maybe, Fixed Maturity Plans would be back in action. So, the debt space is something which people look out for specifically within this new category, which is of target maturity funds which have come up. That is a space which we would watch out for.
If there is a particular theme which is completely unheard of or not done, we will have to see how it pans out.
Just a quick follow-up: why would you watch out for an FMP?
J Gabajiwala: Because the interest rates could be attractive. With the benefit of indexation, your post-tax return could become much better than what you would have. So, today the G-Sec is going somewhere around 7.25-7.30%.
If on the corporate end, they are able to come out with a better yield over there, investors will start looking at that again. But the quality of the paper is going to be a very important criteria because that is the lesson we have learnt over the past two-three years.
Vishal, any thoughts on NFOs?
Vishal Dhawan: There’s very clearly a set of two things that I see happening with NFO launches.
One is funds that are running gaps in their product portfolio are likely to come in and try to fill those gaps. So, we are seeing, for example, conversations happening around some AMCs looking at Balanced Advantage Funds, some AMCs looking at Focused Funds, etc. So, if there is a gap in the portfolio, it’s getting filled in.
Most of the time these are going to be funds which already exist by some other AMCs, have track records–most of that has been through market cycles.
It’s unlikely that you will find anything particularly different here, unless you actually see a manager come in and as an investor, you have faith in a particular manager because you have done well with that particular manager and you wish to allocate.
The space around Target Debt Index Funds is probably where the bigger opportunity lies because I think a lot of debate globally is happening about whether inflation and interest rates are starting to peak out. Therefore, if you want to start those allocations, even if you want to do it in a staggered manner, this gives you a good opportunity.
The reality is that most investors are very uncomfortable with mark-to-market on debt funds. As much as they understand the concept, they hate to see it in their portfolios. Therefore, with a hold-to-maturity solution, they understand the concept a lot better, because it seems so similar to what a fixed deposit actually brings to the table.
They digest it much more easily when they see a mark-to-market impact. So, that’s the space that a lot of people should look at.
Clearly, fixed maturity plans are an alternative. What investors will have to weigh in is the lock-in on the FMP or the relative lack of liquidity because you can only exit it off an exchange, as compared to a targeted fund where you can actually go out and sell it back if you suddenly have a requirement of money.
What should somebody who’s got a goal which is 12 months out or 13 months out? I am using these two terms simply because over a year there could be some taxation changes as well. So, what should somebody who has a goal like this do? Should he or she have any equity fund exposure at all or is it better to be in debt? If she has already started off an SIP in an equity product with a 12-month or 13-month time horizon, from a goal perspective, is it still a good idea to shift to a debt product?
Vishal Dhawan: Clearly, the macro environment should not dictate this at all. What we end up finding very often is there are unexpected events–both positive and negative–which come in and impact equity markets, whether you are doing India or international. Therefore, if you have a 12-13 month investment horizon, in no case is equity really your answer.
If you have started off the SIP in equity with a 12-13 month horizon, you need to stop it right away. There is no reason to run equity SIPs for 12-13 month goals.
You also need to keep in mind that if your strategy is SIP, then effectively your last installment will literally have only a month, your second last will only have two months before you require the money.
Clearly, those are not the right investment horizons for equity. Our suggestion is that, at least for those in the higher tax brackets, they should look very carefully at options like Arbitrage Funds, if they have a 12-13 months’ time frame. They get the advantage of getting equity tax treatment which is 15% short term, which means if they hold for less than 12 months, they will get taxed at 15%. If they hold for more than 12 months, they will get taxed at 10%. That could be one of the alternatives.
The second alternative is to look at hold-to-maturity kind of products, which may also exist in the debt space, but shorter term. We are used to longer-term hold-to-maturity instruments. There are short-term ones as well. Some of them could be maturing, for example, in 2023. Therefore, those could be instruments that you could look at, or there could be funds which are designed with a roll down structure. The securities that they hold will all mature at a particular point sometime next year. So, there are specific schemes available in those instruments that investors can look at.
Clearly, if they are just trying to match their investment horizon of 12 months, 13 months with the product, then ideally ultra short-term funds and low duration funds as categories are very good for investors to look at.
Broadly, these are the three big spaces that investors can potentially look at if they are running a 12-13 month strategy.
Juzer, what is your view on the time horizon–either 12 months or 13 months, or both?
J Gabajiwala: Whatever you may say, if it’s a 13-month time horizon, whether the market is volatile, current scenario, bullish scenario, whichever scenario, it doesn’t make sense to enter into an equity fund. In general terminology itself, we talk about a five-year duration. The second point is that even if somebody does a 13-month SIP, his average holding period is only six-and-a-half months.
What investors can do instead of tracking the returns, because nowadays the returns could be down because of the mark-to-market. Specifically, if your goals are up to 13 months, you should look to track the YTM. The yield to maturity is a good indicator of return, what a person can expect going forward.
Vishal, can you share some names and tell us why you like or dislike them?
Vishal Dhawan: If you look at the hold-to-maturity bucket or the roll-down bucket, you can look at the Aditya Birla Sun Life Crisil AAA June 2023 Index option. The second option that someone can look at is the Bharat Bond FoF/ETF April 2023.
The Bharat Bond series that became more popular, at least in the last few months, have been the 2030-31, the longer duration ones. But if you have a short-term need, look at the April 2023 option.
You can also look at something like a DSP Savings Fund, which has a roll-down option. So, these are all attractive options because yields are anywhere between 6% to 6.5-6.6%, and the duration of the products is just about right.
By the time you take the money out, you have been able to hopefully deal with most of the interest rate risk associated with it.
If you look at the ultra-short or low duration categories, those become attractive because they again run shorter durations in a rising interest rate environment. You reset at a higher interest rate.
You could look at the Birla Savings Fund, for example, or the Kotak Savings Fund in the ultra-short term category. If you want to look at low duration, look at IDFC or Axis Treasury Advantage. These are possible options that you can explore when you are thinking about specific product names and trying to do your own research.
