MUMBAI: The Securities and Exchange Board of India’s (Sebi) renewed push to Execution Only Platforms (EOPs) will fuel innovation and attract new players into the mutual fund industry.
The proposed regulations by the capital market regulator last week will bring much needed clarity on the issues related to EOPs and expand the mutual fund sector by widening the reach of MF products.
Last week the capital market regulator announced the introduction of the regulatory framework for the EOP for direct mutual fund schemes.
What is execution-only platform
Execution-only platforms only perform the execution of orders and do not provide other services like in-house research, advice, etc. A number of entities including Investment Advisers (IAs) and stock brokers, offer execution services in direct plans of MF schemes, through digital mode.
Presently, there is no regulatory framework in place to facilitate the provision of such ‘execution only services’ in direct plans of MF schemes, independent of the regulatory requirements applicable to IAs and stock brokers.
“Under the approved framework, EOPs may be granted registration under either of the two categories - Category 1 EOP as an agent of AMCs, registered with AMFI or Category 2 EOP as an agent of Investor, registered as a stock broker,” said Sebi.
The clarity in guidelines for service providers will instil more confidence among the stakeholders in the mutual fund industry, which in turn will attract new players, say experts. “Any effort on the part of the regulator to further investor interest is welcome. The recent framework for EOP is a step in the right direction. Regulating these platforms will give investors more confidence to transact through them,” Rahul Jain, President & Head, Nuvama Wealth told TNIE.
“Even service providers will now have clear guidelines to follow, and that will bring in standardisation in the whole process. It will certainly bring in more players and more innovation. I think this initiative on the part of the regulator will be a win-win for investors and service providers,” added Jain.
Pros and cons
One of the biggest benefits for retail investors will be convenience and safety of investment.The EOPs have gained popularity as they kept transaction procedures easy for investors. Allowing the platform to
charge fees is another big highlight of the new guidelines which will attract new service providers.
“Both of the registration categories - Category 1 EOP as an agent of AMCs registered with AMFI or Category 2 EOP - may be used for EOPs. The platforms will be permitted to collect fees for either of the categories. This should draw new players to the platform industry that provides direct mutual fund schemes,” Manoj Kumar Dalmia, Founder and Director, Proficient Equities said.
However, these guidelines have left many unanswered issues for service providers and they are waiting for more circulars to get clarity.
“In this circular about EOPs, Sebi is now talking about how they can implement cyber security for customers, mechanism of pricing and service, grievance redressal and appropriate investor protection mechanism, which is very appreciable,” Suvajit Ray, Head of Products at IIFL Securities said. “We are waiting for more circulars from the Sebi regarding these guidelines,” he added.
The mutual fund sector has been able to sustain its growth momentum despite facing pressure due to pandemic-induced slowdowns in the economy.
According to the Association of Mutual Funds in India (AMFI) data, the Asset Under Management (AUM) of the mutual fund industry crossed R40 lakh crore for the first time ever and rose to all-time high levels in November 2022 to R 40.4 lakh crore from R39.5 lakh crore in October 2022.
The rise in AUM was predominantly due to mark-to-market gains in equity-oriented funds.
The AUM of equity-oriented funds by the end of November 2022 was at R15.6 lakh crore compared to R15.2 lakh crore in October 2022. Inflows during November 2022 fell sharply to R 2,250 crore from R9,390 crore in October 2022.
Showing strong growth in the longer period, the industry has doubled AUM in the last five years. The MF industry’s AUM has grown from R22.79 lakh crore as on November 30, 2017 to R40.4 lakh crore as on November 30, this year.
Along with the value, the participation of investors has also risen significantly. The total number of accounts (or folios as per mutual fund parlance) as on November 30, 2022 stood at 13.98 crore, while the number of folios under
Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment, stood at about 11.18 crore.
The mutual fund industry had crossed a milestone of 10 crore folios during the month of May 2021.
Sustained growth momentum
L40.4 lakh crore
AUM of mutual fund industry as on Nov 2022
L13.98 crore
Total number of accounts (folios) as on Nov end 2022
L22.79 lakh crore
AUM of mutual fund industry as on Nov 30, 2017
L15.6 lakh crore
AUM of equity-oriented funds as on Nov 2022
L10 crore
Total number of folios as on May 2021.
L39.5 lakh crore
AUM of mutual fund industry as on Oct 2022