- Date : 21/06/2023
- Read: 3 mins
With digital platforms evolving and becoming a preferred medium for mutual fund investors, the regulatory bodies SEBI and AMFI have mandated Execution Only Platforms (EOP) for Direct Mutual Funds to get registered. Investors' safeguard and security being the motive of this regulation, we need to find out if Direct Mutual funds costs will be impacted.
Digital Platforms and Direct Mutual Funds
Execution Only Platforms or EOPs like MF Central, Kuvera, and Paytm facilitate investors to perform certain transactions like buying, selling, or switching direct mutual funds through digital platforms. With the increasing investor awareness, Direct Mutual Funds are becoming popular as it cuts away distributor commission and gets marginally higher returns than Regular Mutual Fund Plans. Financial advisors sell financial products through their EOP to promote Direct Mutual Funds. Although these digital platforms started burgeoning and gaining popularity, they were not regulated.
What SEBI says
On June 13, 2023, SEBI issued a regulatory framework that mandates EOPs to register with SEBI, effective September 2023.
SEBI says, “While the investors may find it convenient to avail the services of such online platforms, investors who are not clients of such intermediaries may not have protection for the risks associated with such transactions".
Therefore, to balance investor convenience and investor protection, as per the new regulation, no entity could operate as an EOP without obtaining registration from SEBI or the Association of Mutual Funds in India (AMFI).
SEBI to create two categories of EOPs
EOP1 – In this category, EOP has to get registered under the Association of Mutual Funds of India (AMFI) and act as an agent for Asset Management Companies (AMCs). As EOP 1 category will be working on behalf of the AMC, it can charge the transaction fees and client onboarding fees to the mutual fund house (not the investor).
EOP2 - In this category, EOP has to register as a stockbroker and will be an agent of the investor. The framework allows EOP2 to charge a specific transaction fee directly to the investor.
How will Investors get Affected?
Registration of a platform with the Securities and Exchange Board of India (SEBI) is done to ensure compliance with regulatory guidelines and provide investors with a secure and transparent environment. While the registration process may involve certain costs, it may only sometimes be passed to investors.
Experts have opined that charges won't change much for investors. In category EOP1, charges are to be borne by AMCs. However, in category EOP2, it can charge either fund houses or investors. Increase in costs if any will be within capping limits and bound by Total Expense Ratio (TER).
Will Direct Mutual Funds Become Costlier? A quick and straightforward answer to this is ‘Maybe Not’. The Total Expense Ratio (TER) an investor primarily considers while investing is unlikely to go up. While SEBI's regulations may involve costs for market participants, such as registration fees or compliance expenses, their impact on the cost of direct mutual funds would depend on factors like market dynamics, competition among service providers, etc.
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