Much of attention of technology in finance remains on banking. However, technology has played a much more significant role in shaping and changing capital markets. Right from trading to settling billions of transactions, it is being done is a jiffy and in a seamless manner. And then in investing too. One can just buy and sell financial securities in a much easier manner now (though this has made things riskier as well, but that is how it goes).
This piece by Dhirendra Kumar of Valueresearch is on how internet could change mutual fund investing in future. It is a much slower process now which keeps the “app” generation away. Interestingly, this time it is not the regulator but the funds which have opted for the slower process:
Even as the digital revolution is transforming every kind of commerce, investing in mutual funds seems firmly stuck in the early years of internet-enablement. Think of a youthful new investor, used to downloading an app or opening a website and getting everything done within minutes. Such an investor would be surprised to discover that face-to-face, physical verification and even paper forms are still the modus operandi for investing in mutual funds.
This seems to be the case because under the Prevention of Money Laundering Scheme, the onus of positively identifying its own customers lies with each business independently. They take the view that it doesn’t matter if someone has been biometrically identified by Aadhar, and has had an in-person verification for a bank account linked to that Aadhaar!No mutual fund will let you invest without such a process, even if you have an Aadhaar number and a netbanking-enabled bank account linked to Aadhaar. The surprising thing is that if you have these two, then you can start a new National Pension System (NPS) account and begin investing in it through an entirely online process.
But in mutual funds, no such thing can be done. Recently, in an interview with Value Research’s Mutual Fund Insight, I asked SEBI Chief UK Sinha why this was the case. His answer was a surprising one. He said that such a thing was possible and had been so for a year. However, mutual funds choose not do so.
Similar issues were seen earlier as well:
My mind goes back to 1992, when the IPO of Master Gain, a closed-end fund from the then Unit Trust of India unexpectedly got 65 lakh applications. These were paper forms which people queued up to first buy and then deposit. Most banking, cheque clearing, record keeping statements, unit transfers etc were all obviously paper-based and manual. A significant chunk of investors had long-running issues because of faulty records, signature mismatches and other problems. I know because I was one of them.
Even at the time, it was obvious that complete computerisation and networking was the only way forward. And yet, if you had told me back in the day that fully networked and computerised access to autorickshaws would arrive before it would for mutual funds, it wouldn’t even have sounded like a good joke. However, I’m sure that these days will soon pass. The kind of push that is now coming from customers as well as regulators for end-to-end digital flow for investing means that it won’t be long before the change arrives. SEBI has set up a committee under Nandan Nilekani to lay out a roadmap on the issue, and RBI is apparently onboard for bank KYCs being valid. Sinha believes that we are heading for a quantum leap in the way people get digital access to fund investing.
What is needed is a unified way for investors to start and access fund through a single interface for all funds. Of course, like all such changes, this will be disruptive for many who are part of the process now. There will no doubt be disintermediation, and there will be a levelling of the playing field between big players and small. No doubt, the big players will not like it and will resist it in some way. That’s where both customer pressure and regulatory push will play a role. The potential of the pie becoming larger should surely be the bigger attraction than fighting over slices of a smaller pie.
The point about digital transactions is not that they should be not just possible but overwhelmingly more convenient and substantially cheaper. If that is true then usage will explode. The benefits that will come through are enormous. It should be easy and quick to learn about mutual fund investing, choose an investment and then transact with minimal friction. The democratisation of investing that can come through such access can have a transformative effect on the whole activity of investing.
For all you know some funds are already on the way as some commentators have pointed. SEBI continues to do things without making much noise..
Actually more than these supposed changes, we need good cheap internet connectivity and proper electricity to run the show. In India’s app design city, we have neither of these two things..