Cash investments in MFs can be tricky

Investors will now be able to invest in mutual funds (MFs) through cash, up to Rs 20,000

india Updated: Aug 31, 2012 23:47 IST
Kayezad E Adajania
Kayezad E Adajania
Hindustan Times

Investors will now be able to invest in mutual funds (MFs) through cash, up to Rs 20,000. For the Rs 7.3-trillion Indian MF industry that has moved towards accounting for every rupee invested in the past few years, this one may be a bit of a surprise. Though it does not mean much for you, the urban mass affluent investor, the move is significant in making it easier for those in the unorganised urban and rural areas to invest.

Making inroads?
Securities and Exchange Board of India (SEBI) chairman UK Sinha perhaps took a cue from his previous tenure as head of UTI Asset Management Co Ltd, now the country’s fifth-largest fund house with assets of Rs 60,293 crore as per June 2012 data. Under Sinha’s leadership, UTI AMC inked deals with several local organisations across India. These organisations — or societies as some of them are popularly called — have members from the economically-weaker sections of the society and daily wage workers, who don’t necessarily have bank accounts but still wish to set aside a small sum, say Rs 100-200 every month towards investing. The society pools in all the money and gives a single cheque to UTI AMC that would then invest this money in one of its schemes, typically UTI Retirement Benefit Pension Fund.

Its tie-ups with organisations such as Basix, a Hyderabad-based livelihood promotion firm, Srei Sahaj, a subsidiary of Srei Infrastructure Finance Ltd, a firm that offers various government and public utility services to rural India and SEWA (Self Employed Women’s Association) Bank, Ahmedabad, have really helped. Otherwise, it would have been difficult for such investments to directly reach the fund houses or even to prescribe to the minimum investment criteria most MFs impose.

Allowing cash investments is not exactly the same thing, but Sinha, it seems, wants to increase the appeal of MFs. Consider some other measures he has announced, such as encouraging post offices, retired government and bank officials, teachers to become MF distributors, lowering the entry bar to make it easy for them to become distributors and incentivising MFs to distribute their products in cities outside the top 15 cities.

Cash investments are aimed at those investors who would, typically, invest in micro systematic investment plans (SIPs). Micro SIP is a facility that allows you to invest up to Rs 50,000 a year. Targeted at the weaker sections of society, micro SIPs do not require investors to submit their Permanent Account Number (PAN). Even cash investments do not require PAN card; other photo identity proofs such as the Aadhaar letter can be used.

Are fund houses equipped?
Some distributors feel that this is a good move. “This initiative will help bring new investors. To that extent, SEBI’s other move to allow new types of distributors in the business, such as teachers, retired bankers and so on, will also solicit cash investments in remote areas,” says Manish Gadhvi, head, Mumbai operations, NJ India Invest, one of India’s largest retail MF distributors. In addition to cash investments, the MF industry also needs more distributors, says Gadhvi.

“People in small towns usually invest in gold. They also invest in chit funds and plantation funds (collective investment schemes) that are not well-regulated. Allowing them to invest in MFs in cash will have a good impact,” says Surajit Misra, national head, MFs, Bajaj Capital Ltd.

Fund houses, however, aren’t too enthused. Since the industry is not used to accepting cash for at least 15 years now, this could be tricky. “I am not a fan of cash investments. Apart from our prevailing system of KYC (know-your-client) adherence, accepting only cheques and so on, there is a lot more accountability of the money that comes in; it also has a trail,” says Puneet Chaddha, chief executive officer, HSBC Asset Management.

The key question is: how would fund houses accept cash — would investors be allowed to walk into the fund house’s branch and hand over cash? “Fund houses can’t work like banks. We cannot handle customers walking into our offices with cash,” says the head of marketing of a public sector bank-sponsored fund house on the condition of anonymity.

Some fund houses feel that perhaps they will have to tie up with a bank. Investors can walk into a bank, deposit cash, get the pay-in slip (a slip that needs to be attested by the bank at the time cash is deposited) signed and stamped, attach this slip with the application form and submit it to the fund house.

The market regulator will also need to clarify as to how fund houses will be allowed to redeem such investments. Will fund houses be asked to redeem such investments in cash? Or will they be allowed to issue cheques, instead? Note that these investors would not have bank accounts in the first place, so cash redemption appears to be the only answer.

Should the poor invest?
By allowing investors to invest in cash in MFs, SEBI has encouraged those who do not have a bank account or a PAN card. Good intentions aside, is SEBI targeting the right sort of people to invest in MFs?

“To even think of the economically-weaker sections of the society investing in MFs, we need a fair amount of education to be conducted for them. Many of these people invest in chit funds; they don’t even have bank accounts. First, they should open bank accounts. From there to MFs, it is a big step,” says Veer Sardesai, a Pune-based financial planner.

First Published: Aug 31, 2012 21:00 IST