The Indian capital market regulator SEBI in its August (2012) board meeting, has allowed cash transactions in mutual fund schemes to the extent of Rs. 20,000 to help enhance the reach of mutual fund products among small investors, who may not be tax payers and not have PAN (Permanent Account Number) or bank accounts such as farmers, small traders & workers.
High Cost..!
The biggest deterrent to this facility is the high cost involved in setting up cash management facility.Bank distributors will not be keen to sell this product as they would be talking to people without bank accounts. Instead of selling funds, they would sell SB accounts, said the CEO of a middle size fund house.
And even if I manage to collect some unbanked investors, how am I supposed to pay back during redemption's As a fund house, I am only allowed to pass on redemption proceeds through bank accounts, he said.
Fund houses also think they can make very little profit from the cash-transaction route against a substantial capital investment that will be needed to put it in place.
According to industry sources, the cash transaction facility will not be a viable proposition as fund houses will have to enter into collection tie-ups with banks or / start their own collection offices. Also, fund houses are not very clear about KYC (Know Your Customer) norms to be followed while collecting cash.
Mr. Ashvin Parekh, Partner and national leader (Financial services), Ernst & Young said, ''Formalities such as in person verification may prevent the facility from taking off. Establishing accountability becomes difficult in cash transactions. Also there could be a lot of issues with regards to cash handling. If the cash is mis-appropriated or / embezzled by the intermediary or / collection agent, there is limited recourse for the investor, Mr. Ashvin Parekh said.
Mr. Gautam Mehra, leader - Asset Management, PwC India, said,''Big worry is the facility becoming a conduit for money laundering. Cash-transaction facility will probably work for players with existing bank joint ventures".
AMCs (Asset Management Companies) do not see huge investment inflows through this route. Cost involved in handling cash investments & accounting complexities are other deterrents.
Fear of Frauds..!
Besides, fear of frauds, money laundering & meddling by tax officials and economic intelligence agencies are holding back fund houses from going ahead with the scheme. The pie is too small & we do not expect much inflows though this route, said the Head marketing officer of a private fund house.
Cash investment route, we believe, is for investors who do not have bank accounts. But the question that crops up is, why would an investor who does not even have a bank account invest in MFs the official asked.
Src: ET
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