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Rediff.com  » Business » Now, stockbrokers to be a happier lot. . .

Now, stockbrokers to be a happier lot. . .

November 30, 2009 12:51 IST

Starting today, your friendly neighbourhood stockbroker is going to be happier than what he used to be.

The reason? From today, you will be able to buy and redeem open-ended mutual fund schemes on the National Stock Exchange through your stockbroker. The Bombay Stock Exchange too will follow suit soon.

This is as per the Securities and Exchange Board of India's prescription a while back. It comes on the back of entry loads being banned for mutual funds, leading to the commissions that mutual fund distributors charge investors going for a toss.

And so, with 200,000 terminals across 1,500 locations, buying and selling of mutual fund units will be a much easier, quicker and effortless task. All you will have to do is to place an order with your broker for a particular mutual fund, just like you would for buying shares.

Now, isn't that great news for investors.

Or is it?

The earlier system of distributors getting paid fat commissions for peddling a particular fund house's fund was scrapped. This was mainly to get rid of the prejudice that a distributor would have in selling one fund over the other not because he felt it was better but because it offered him a fatter commission.

Also as those commissions came straight out of the money being invested by the investor, it would take a big bite out of the investment even before that money would be put to any use by the mutual fund.

So isn't this new system much better? Not so fast.

A closer look leads to much skepticism. It leads to some points that should make the alert investor very cautious.

For starters, stockbrokers, above all else, are concerned with their brokerage. The more you buy and sell, the more brokerage they make. It's as simple as that.

This leads to stockbrokers as a whole wanting you to buy and sell as often as possible. In other words, 'churn' you portfolio.

They have been able to successfully make most investors do that with their stock portfolios. There is no reason why they will stop at that. You need to be ultra careful that your mutual fund portfolio too does not meet the same fate.

For an investor wanting to make good returns over the long term, he needs to be invested with a long term perspective. Shuffling and switching funds is never a good idea.

Second, and potentially more lethal is the relationship brokers and mutual funds will now share post this change of system. They will, in a way, be dependent on each other for revenues.

Expect it to go something like this: broker sells particular mutual fund, mutual fund makes money. Mutual fund trades through a particular broker, broker makes money.

The incentives are not in any way different than the earlier system of mutual fund distributors. Nothing will stop a stockbroker from advising his clients to buy a particular mutual fund, not because he feels that it is the best one around.

But because the broker shares a tacit relationship with a fund house, which has promised to place the entire fund's orders only through him. Indeed!

Dalal Street, just like Wall Street, is in the business of making money. And they will not miss any opportunities to make money at the investor's cost. Investors have few friends here. It is each investor for himself.

And the best you can do to navigate the perilous seas of Dalal Street, dear investor, is make sure that your investment decisions are in the hands of someone who is unbiased. Someone who advice is not tainted with his own penchant for making money.

Equitymaster.com

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