NEW DELHI: Even as stock market trading in over 25 lakh demat accounts without permanent account number (PAN) stands suspended for over seven months, the investors are yet to furnish the necessary details required for regularisation.

The latest data available with National Securities Depository Ltd. (NSDL) and Central Depository Services Ltd. (CDSL), the two leading depositories, reveal that 25.4 lakh demat accounts still remain suspended owing to non-compliance of PAN details. At this level, it works out to nearly 60 per cent of the 44 lakh accounts that stand frozen with effect from January 1, 2007. Interestingly, out of these frozen accounts, over 11 lakh accounts have some shares in their portfolio, although it marks a decline from more than 20 lakh such accounts at the beginning of the year. Those without any shares in their portfolios number nearly 15 lakh as compared to 23 lakh such accounts at the commencement of the suspension exercise.

Accordingly, while the number of suspended accounts with shares in their portfolio has declined by about 45 per cent, those without any balance has shrunk by 35 per cent. At present, the two depositories maintain a total of more than 105 lakh demat accounts, up from nearly 99 lakh at the beginning of this year.

However, the total number of active accounts, with the investors having provided the PAN details, is only about 80 lakh currently as compared to about 55 lakh when the suspension exercise began.

Mutual funds are a great instrument for retail investors to participate in equity markets. They offer professional management of investor’s money and spread out costs of doing so over a large asset base. Last few years the Indian retail investor has taken an increasingly greater interest in the mutual fund route. This is a welcome trend as it gives retail investors a vehicle to invest in equities at risk lower than that of investing directly in stocks.

Now that investors are waking up to mutual funds, they should understand a few intricacies of making the best use of that vehicle. A common error most investors tend to make is holding too many funds. This as we explain below is a wasteful exercise.

Mis-treatment of mutual funds as equity stocks

Many investors tend to treat mutual fund schemes as equity stocks. They feel that just as holding 2-3 stocks is inherently risky, so is holding 2-3 mutual funds. When they try to apply the traditional wisdom of diversification to their mutual fund portfolio, they naturally think about spreading their investments over a large number of funds – say 15-20.

A mutual fund itself invests in a large number of stocks. More focused funds (e.g. sector funds) invest in anywhere between 20 and 50 stocks while the diversified funds often invest in as many as 80-120 stocks. Each fund also has its own way to stock selection.

Thus often 10-15 mutual fund schemes, especially diversified ones, among them will cover a lot of different stocks. This in effect amounts to holding the market portfolio itself. We show an illustration of the same below.

The issue with holding stock market portfolio is that the mutual fund route is a costly method to do so. Equity mutual funds charge an entry load (and occasionally exit load) which goes to pay the distribution channel they use e.g. mutual fund broker, online investment sites. Mutual funds also charge the investors regularly for the expenses of running the fund as also professional advisory fees for their expertise. This is summarized into the expense ratio of a scheme which tells the investor how much it cost her this year to use the services of the asset management company.

This expense ratio is a per cent of the asset under management and is taken out of the net asset value of the scheme. If the expense ratio is 2 per cent, it means the asset management company has taken 2 per cent of the NAV of the scheme towards its fees and fund management expenses. The expense ratios vary between 1.5 and 2.5 per cent for equity mutual funds and are charged annually.

Self-defeating logic of excessive mutual fund diversification

Consider a mutual fund portfolio of 15 schemes. If our assertion is correct, this will provide returns in line with the overall stock market but will not beat it significantly. Over and above that, you will pay two per cent every year towards fund management.

A large proportion of this – i.e. the advisory fees – is in principle taken by the fund manager to beat the market. Hence if you have managed to stay only in line with the market and not beat it, the twp per cent you paid to various fund managers was an unnecessary expense. You could have simply invested in stock market index instead. That would have cost you less than one per cent per year and would have been much easier to manage as well.

You can invest in the broad market index in two ways. One is to invest in index fund schemes offered by various mutual funds. Second is to invest in Exchange Traded Index Funds. The second however requires a demat and trading account.

In either of these approaches, you are essentially investing in the market as a whole rather than specific stocks, sectors or themes. This model of investing is called passive investing and is a preferred mode of investing by many retail investors in developed markets.

The difficult way out!

However, this still does not mean that the mutual funds are redundant or retail investors should reconsider investing in active mutual funds. What is crucial to understand is that investors should not invest in too many actively managed mutual funds since that negates the very purpose of active investing.

The true purpose of active investing is to attempt beating the market returns. The fund manager charges the investor to do so. The investor in turn should ensure she gets the bang for the buck by restricting her fund selection to 5-7 schemes.

The biggest question is which schemes. Often an investor who is not sure about the answer to this question ends up reducing the risks by “diversifying” into 15-20 schemes. The methodology to select best mutual funds cannot be covered in this article since it requires a much detailed treatment.

Also, there are investor specific considerations which drive the selection. We recommend that the investor should either employ a financial advisor or do his own research to select appropriate schemes. If neither is acceptable or possible, the investor is much better off investing in index funds instead.

-rediff

SMS alerts for cricket scores, movie tickets, salary credit and now even share transactions. NSDL, the country’s largest depository, has launched a new service for small investors, through which SMS alerts will be sent out on shares that are debited from their demat account. The scheme is only for small investors and not daily traders. SMSs will be sent out for only upto five ISINS or debits in a day.

Jayesh Sule, Executive Vice President, NSDL, said, “The SMS will carry the scrip name and the number of shares that are debited.”

The service is free of charge and SMSs will reach investors next morning after they have transacted. Interested investors have to provide DPS with their mobile numbers to avail the facility. The service will be given by all 250 NSDL DPS by September.

The facility will go a long way in reducing broker-client disputes on whether or not the right number of shares were debited. It will enhance transparency and build investor confidence.

NEW DELHI: Forget stock markets for a moment, ‘demat‘ could be the next buzz word for India’s realty deals. In what could turn out to be a major step forward in making real estate sales far more transparent, Rajasthan government has taken an innovative approach to dematerialise property transactions.

The Central government may like other states to follow such a process, top official sources told SundayET. The government of Rajasthan, which has begun the process with the help of an NGO on urban governance Janaagraha, plans to dematerialise the sale deeds before linking those to local municipal bodies.

Once dematerialised, all property deeds will reflect the authenticity of the land titles, payment of property tax and dues to banks etc., which in turn, will ensure that no buyer is duped in property transactions. What’s more, there could be online transactions of buying and selling of properties in future with the use of demat accounts.

When contacted, urban development secretary M Ramachandran said that the Centre would like to push for all innovative reform measures on the sector if they help the consumers. “Let me make it clear that the real estate is a state subject, and hence, we can’t dictate terms to the state governments.

Rajasthan has already shown some initiatives in dematerialising sale deeds. It will bring in transparency, and we would like other states to follow such models,” Mr Ramachandran said. Pradeep Jain, chairman, Parsvnath Developers said that it would prevent frauds and help genuine players in the sector.

Significantly, the Centre has been pushing for urban reforms under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), and according to the programme, performing cities will receive Central grants much faster than the rest.

“Though various states have taken up reform initiatives on their own, we will shortly organise workshops to make people aware of our reform agenda. Under reform initiatives, Gujarat too has passed a legislation on public disclosure which will bring in transparency,” secretary pointed out.