To smooth out these and other issues, the Association of Mutual Funds in India (AMFI), on Sebi’s direction, has asked asset management companies (AMCs) to suggest changes that could streamline the operations of the mutual fund industry and benefit investors.
Here are four changes that a few AMCs suggested, which they shared with Mint on the condition that they not be named.
Stamp duty headaches
Buying units of mutual funds attracts stamp duty at the rate of 0.005%. This minuscule deduction creates completely avoidable downstream complications for investors, as all allotments end up being for odd sums of money, said a fund house.
For example, a person who invests ₹10,000 ends up being allotted units worth ₹9,999.50. This applies to every single inflow transaction, including switches. As units are themselves fractional, as they are transacted at the applicable net asset value, this further complicates matters for investors.
Also read: When buying financial products, scepticism is your best defence
As stamp duty is a statutory levy, the current implementation ensures the tax is levied on the investor. However, to make the process more concenient, the fund house recommended allotting units for the full sum and adjusting the stamp duty against actuals against the total expense ratio (TER) that funds charge.
Amol Joshi, a mutual fund distributor and founder of PlanRupee, said first-time investors often ask him why the amounts invested are less than what they put in. Making this tweak will make such investors more comfortable, he added.
Proliferation of tiny folios
Over the past several years, the mutual fund industry has seen the proliferation of folios with tiny holdings. This is largely due to fractional units remaining in the folio if the investor redeems most but not all units.
A fund house cited the following example. If an investor holding 100.25 units places a redemption request for either 100 units or the value of these units (based on the last declared NAV), the balance units (say 0.25) remain in the folio. Given the tiny sums involved, most investors don’t bother to redeem these units. The problem is further compounded by platforms not allowing redemption of holdings below a specific threshold, the AMC added.
While making its recommendations, the fund house submitted that its own analysis of investor data suggested that a sizeable proportion of redemptions that result in tiny residual balances are initiated from the exchange platforms.
Also read | EPF nightmare for NRIs: Service gaps, missing UANs, and frozen funds
The problem with these folios is that they continue to be serviced at the cost of the mutual fund schemes. This cost is disproportionately high compared to the TER charged against these units, the fund house said. The cost of these tiny holdings is thus subsidised by other unit holders, it added.
For context, the annual cost of aggregation of a folio (including those with minuscule holdings) is ₹3.60 per folio for NSDL e-CAS, and ₹24 per folio for a printed NSDL CAS. Such tiny holdings also lead to minuscule IDCW payments, posing challenges for both payouts and reinvestment.
The fund house said this issue can be solved in the following way.
- While selling, apply redemption to all units in cases where the value of the balance units is less than a certain threshold, say ₹500.
- For existing folios below a specific value threshold, initiate a one-time redemption to extinguish the residual units after informing the investors concerned.
The fund house said there may be several instances where the value of the holdings is less than the cost of processing and paying out the proceeds. Its recommendation in such cases is to redeem these minuscule investments and credit them to the investor education fund.
Unclaimed IDCW payouts
Investors who choose funds with IDCW payouts receive payments directly in their bank accounts. In cases where the payments are rejected, physical demand drafts (DDs) are sent to the investors. DDs that are not encashed in 90 days are transferred to the unclaimed account. Service teams must then continuously follow up with investors to get them to claim these sums, said an AMC.
An analysis by the fund house suggested that such unclaimed IDCW payments keep accumulating with the same set of investors. “Multiple attempts to reach these investors and remit the sums to them have been unsuccessful,” the fund house said.
Also read: ITR forms seek more disclosures this year. Here’s what to expect
To solve this issue, it recommended converting IDCW payouts into reinvestments in cases where three consecutive payouts have not been claimed. “This would arrest the proliferation of unclaimed sums,” it said.
Joshi of PlanRupee said even if investors link a new bank account to the folio, most AMCs don’t allow online redemption for unclaimed units. Investors must instead visit a physical registrar and transfer agent (RTA) or AMC branch to do so. This issue persists across all online channels, including AMC websites, RTA platforms, and Mutual Fund Utilities (MFU). Joshi said AMC should allow online redemptions for unclaimed units to make life easier for investors.
Information overload
Even mid-size mutual fund companies have lakhs of investors and folios, and the larger ones have crores of folios. That means every communication over email goes out to lakhs or crores of people. If such communications are frequent, they start to become an operational burden, said an AMC.
It said many of these emails, especially ones about minuscule changes to the TER, provide little value to investors but increase the cost of compliance and communication for fund houses.
“I believe the communication requirements related to TER changes could be revisited,” said an official at the AMC. “Often, these changes are tiny – for instance, from 0.6721% to 0.6722% – and may be more appropriately communicated on a quarterly basis rather than in real time.” Such emails are unnecessary as AMC websites update TER values on their websites daily, he added.
