Retail investors may be unable to tap govt ETF

The lack of a robust distribution network for the sale of mutual fund products in India could limit the participation of retail investors in the Rs 3,000-crore (Rs 30-billion) new fund offer of the central public sector enterprises’ exchange-traded fund, which opened on Wednesday.

Sources said many individual investors were interested in applying for the NFO, due to additional benefits being offered such as upfront discounts and loyalty bonuses.

But many might not be able to invest due to lack of support from distributors.

Technically, this is the first time the government is divesting through the MF route.

In the past, most divestments have been through traditional share sales. Share sales are through stock brokers, unlike MF schemes, which need the support of distributors.

“The CPSE ETF cannot be sold through stock brokers, as Sebi rules don’t allow it.

“The applications in the NFO have to come through MF distributors.

“Large distributors, which have online presence, have been empanelled to sell the product.

“However, there could be logistical issues for investors wanting to make physical applications,” said a person privy to the matter.

The MF distribution network, which has shrunk in recent years, partly due to the ban on entry loads, pales in size compared to the reach of stock brokers across the country.

The number of MF distributors is said to have more than halved after Securities and Exchange Board of India did away with entry loads in August 2009.

The regulator attributed the rampant miss-selling of MF products to this upfront fee. Many distributors quit selling mutual funds after the ban, as business turned unviable.

“Distribution of equity MF has been dismantled due to various regulations. This product could also be a victim of that.

“Distributing any MF product is a huge challenge these days,” said Sudip Bandyopadhyay, president, Destimoney Securities.

“The absence of a network in tier-II and tier-III cities is likely to have an impact on the reach in these areas. In these areas, distributors have limited presence, and this could have an impact on collections from them,” said an intermediary.

A Sebi note said, “The top 15 cities contributed 87 per cent of the total assets under management of the MF sector, as of December 31.”

On Tuesday, the CPSE ETF garnered Rs 835 crore from seven anchor investors.

“Their response and the inquiries surrounding the CPSE ETF have been very encouraging. Efforts are being made to reach as many investors as possible.

"As the product is good, we are seeing investors reaching out to their mutual fund distributors and asking for this product,” said Vineet Arora, executive vice-president, ICICI Securities, the advisor to the ETF.

Goldman Sachs Asset Management is managing the CPSE ETF, the NFO for which closes for subscription on Friday.

Image: The number of MF distributors is said to have more than halved after Securities and Exchange Board of India did away with entry loads in August 2009 ; Photograph: Reuters