InvestorQ : What is the meaning of the new SEBI announcement that investors cannot buy mutual funds through brokers? How will that impact as an MF investor?
Sam Eswaran made post

What is the meaning of the new SEBI announcement that investors cannot buy mutual funds through brokers? How will that impact as an MF investor?

swati Bakhda answered.
3 years ago

Let me clarify at the outset that it is not a SEBI announcement regulation but only a discussion paper. The final decision will be taken by SEBI only after eliciting comments from the various stakeholders. The discussion paper proposes to put a halt in purchases and sales of mutual funds through pool or escrow accounts of brokers and online platforms. The move comes in the wake of the apparent misuse of the pooling system in the Karvy case. This move is intended to protect the interests of the mutual fund investors; who are predominantly small and medium sized investors. SEBI has, instead, proposed direct credit and debit of investor bank accounts for mutual fund transactions.

Currently the way an investment in mutual funds via brokers works is something like this. An intermediary can first aggregate the money of customers and then pass it on to AMCs (and vice versa for mutual fund redemptions). Such transactions are called pooled transactions. An example of this is purchase of mutual funds through a stock broker where the money is first collected in the broker’s pool account. Platforms such as Mutual Fund Utility (MFU) also use an escrow account to collect investor money before remitting it to AMCs, which is again a pooled transaction. The discussion paper wants to get rid of this pooled facility altogether so that the funds are not parked with the broker or the intermediary before reaching the AMC.

This will not be an issue for Direct Investments; directly with the AMC without broker. But broker routed MF investments are of 2 types; pooled and non-pooled. In the non-pool flow (example is BSE MF STAR Platform) the money flows to the AMC through a clearing corporation of a stock exchange. Distributors and investment advisors conducting transactions through the BSE Star MF platform use the non-pool method. Such transactions involve collection of money through the clearing corporation and not the intermediary. In FY 18-19 the share of pooled transactions and non-pooled transactions are almost the same.

What SEBI is proposing through this discussion paper is an end to pooled transactions only, while non-pooled transactions through the clearing corporation can continue as before. There is also a practical problem pointed out by SEBI. In case of pooled transactions, the job of the AMC ends with transferring funds to the broker pool account. After that, if the client has any grievance, they have to take up with the broker and not with the AMC. This would also get resolved with a ban on pool transactions. All in all, it is likely to make life for mutual fund investors safer and quicker.