Opt for Basic Services Demat Account

Most of us have one or multiple demat accounts where the investments (stocks and mutual fund units in this case) are held.  The charges for demat account varies across players but generally are upwards of Rs. 400 per annum.  For eg: ICICI Securities charges Rs. 500 per annum for a demat account.

However what many of us are not aware about is in case the holding in our demat account is not significant, we can opt to switch to Basic Services Demat Account (BSDA) where charges are capped at Rs 100 per annum. 

Though Rs. 400 per annum of savings may not be a significant amount, the objective here to use the low cost facility available without compromising on the features and benefits.  In this post, we shall delve into features about BSDA and who can open it.

Who can have BSDA?

Sebi vide its circular dated August 27, 2012 mandated depositories to provide an option from October 1, 2012 to all retail individual investors to open BSDA.  Thus this is an old concept but not many are aware about it since it has not been publicised by depositories for obvious reasons.  An individual can have one BSDA account across all depositories.  Such individual should be a sole or first account holder and the demat account can be treated as BSDA if the total value of the securities held in such account does not exceeds Rs 2,00,000 at any point of time.

For eg: If you are having two demat accounts, say one with ICICI Securities and another with HDFC Securities, only one out of the it can be BSDA provided the value of securities in such demat account does not exceeds Rs. 2,00,000.

Similarly if in one demat account you are the sole holder and in the other you are not the first holder, then the demat account where you are the sole holder is only eligible for BSDA, again provided the value of the securities does not exceeds Rs 2,00,000.  However the other demat account can be eligible for BSDA for the first holder of that account.

Charges

The charge for BSDA depends on value of securities in the demat account.  If the value of securities does not exceeds Rs. 50,000, then there is no annual maintenance charge.  In case the value of securities is between Rs. 50,001 to Rs. 2,00,000, then the maximum amount the depository can charge is Rs. 100.  If the value of securities in a BSDA account exceeds the above limit on any day during the tenure, then it ceases to be BSDA account and charges applicable to regular accounts shall apply from that date onwards.

How is value of securities determined?

Value of securities is determined based on the market value of securities held in the account. In case of unlisted securities, face value shall be taken into account.  In case of mutual fund units held in demat account, daily NAV shall be used to determine the value.  Such value should not exceed Rs. 2,00,000 to qualify for BSDA.

How to open BSDA account?

An individual can choose for BSDA account at the time of opening a demat account.  In case one already has a demat account, there is an option to convert the same into BSDA account at the end of the billing cycle provided the value of securities in demat account does not exceeds Rs. 2,00,000.  Infact your depository shall provide you the option to convert your account into BSDA before commencement of next billing cycle based on the value of your holdings.

Other features of BSDA account

• An individual shall receive transaction statement at the end of each quarter provided there are transactions during the period. 
• An annual physical statement of holding shall be sent at the end of the year.
• Electronic statements shall be provided free of cost.
• In case of physical statements, the depository shall provide at least two statements free of cost during the billing cycle. Additional physical statement may be charged at a fee not exceeding Rs.25/- per statement.
• SMS facilities for transaction alert is provided without any additional cost.
• Minimum two delivery instruction slips shall be issued at the time of opening BSDA.

Bachhat’s take

While the monetary benefit is not significant in absolute term, it is always preferable to have services with minimal cost and one can opt for BSDA if the holding does not exceeds Rs. 2,00,000.  Further in case of a family having multiple demat accounts, each account is eligible for BSDA if the accounts are in the name of different family members.

Where you aware about BSDA?  Will you opt for or have opted for BSDA?  Do share your thoughts and comments in the comment section below.

Whether labeling makes it easier to invest in mutual funds?

Continuing with various regulatory changes in mutual fund space, SEBI earlier during this week mandated mutual funds to label their offerings.  The purpose of labeling is to address the issue of mis-selling by enabling investors an easy understanding of the kind of mutual fund scheme they are investing in and its suitability to them.

Changes suggested

With effect from 1^st July 2013, all mutual fund companies shall label their schemes on the following parameters:

1.  Nature of scheme: whether the scheme is to create wealth or to provide regular income and its time horizon - whether short, medium or long term.

2.  Investment objective: All schemes shall describe its objective in a single sentence along with whether it is an equity, debt or hybrid product.

3.  Riskiness of investments: which shall categorized the risk attached to return of principal amount.  To achieve this, SEBI has suggested colour codes as below:

·       Blue             – Principal at low risk

·       Yellow         – Principal at medium risk

·       Brown          – Principal at high risk

4.  Further all schemes shall have a disclaimer that if the investors are not clear about the suitability of the products, they should consult their financial advisers.

All key documents (such is Key Information Memorandum, Scheme Information Documents, etc) as well as scheme advertisements should prominently disclosed the above labels.

For example, Fixed Maturity Plan shall come with the below mentioned labeling.

Whether it actually simplifies the investment process for investors?

Though the intention of SEBI is good, one needs to see whether this simplifies the investment process for the investors.  It is difficult to categorize the investments based on risk.  One single rule cannot be applied everywhere. 

Are all debt schemes low risk investments?  For eg:  FMPs, in general, may have low risk of principal amount getting reduced but it depends on the kind of company the mutual fund scheme has invested in.  If the investment is in low quality / rated company, the actual risk coding should not be blue but yellow or may be brown in case of investment in junk papers. 

Nevertheless, this is a good attempt by SEBI to simplify mutual fund investing for investors.  These labels can be used as an initial screener to short list the schemes one wants to invest in, followed by more scheme specific evaluation.

What do you feel about the labeling of mutual funds?  Will this simplify your mutual fund selection process?  Do share your comments with us.

Backstage entry of loads in Mutual funds?

SEBI, in its yesterday's meeting allowed mutual fund distributors to charge Rs. 100 as ‘transaction charge’ per subscription.  This charge is applicable only if the investment amount is Rs. 10,000 and above.  In case, the investor is investing in a mutual fund for the first time, an additional amount of Rs. 50 can be charged (i.e. total transaction charge of Rs.150) since Know Your Customer (KYC) norms needs to be fulfilled for such new investors.  In case of SIP investments, the transaction charge can be recovered in 3 or 4 installments.  The transaction charge will be deducted from the amount invested.

Transaction charge is applicable only on purchases and not at the time of sale.  Further, if an investor purchases directly from the mutual fund company (i.e. online via their website or directly submitting the form in their offices), no transaction charge is levied since distributor is not involved in such cases.

How will it impact you?

Prior to SEBI’s ban on entry load in August 2009, 2% of the invested amount was deducted as load for equity mutual funds and for debt funds there was no entry load.  Rs. 100 per subscription for Rs. 10,000 and above works out to maximum 1% irrespective of whether you invest in equity or debt funds.  Hence the cost of investing in debt funds will increase and have impact on your returns, more so since the debt fund returns are generally in single digits.

Though this charge will allow distributor to recover transaction related costs, they still shall not be incentivised to sell more mutual fund products.  The commission they earn on ULIPs and other investment products are linked to the value of the transaction and shall be quite substantial in comparison to the transaction charges. 

Thus, this shall not compel distributors to sell more of mutual fund products and the objective of SEBI to ‘enable penetration of mutual funds in smaller towns’ by allowing the above transaction charge may still not be achieved.

Can distributors still mis-sell mutual funds to me?

Yes.  Distributors earns only if you invest more than Rs. 10,000 per subscription.  Thus there is a possibility that distributors will tell investors to investment minimum Rs. 10,000 in every mutual fund transaction.  Also, in case one is investing say Rs. 30,000, distribution will tell investor to fill three different subscription forms for Rs. 10,000 each thus pocketing Rs. 300 as transaction charges (Rs. 100 per subscription form).  There is no dearth of ideas to extract more money and many more will evolve as time progresses.

How can you avoid / minimize transaction charges?

The best way, and the one Bachhat recommends is to invest in mutual fund online.  This will not entail any transaction charge.  In case you are living in cities where mutual fund company’s investor offices are located, you can submit the subscription form directly in their offices.

Also Read - Your Guide to Invest in Mutual Funds

 

Alternatively, you must ensure that in case you are investing regularly, you minimize it by either making your SIP period longer (i.e. instead of renewing your Rs. 5000 SIP every 3 months, make it for 12 months, so that you incur transaction charge only one time instead of 4 times earlier) or ensuring that each investment does not cross Rs. 10,000.

Will this move of SEBI make you change the way you are investing in mutual funds?  Do share your comments below.