The Hindu Business Line : No cheques, only ECS for systematic investment plan, say mutual funds

CONVINCED about the arguments that favour systematic investment plans as the ideal route to disciplined and regular investing? Then make sure that you have electronic clearing facility (ECS) for your bank account.

Faced with increasing logistical difficulties of cheque handling, mutual funds houses are beginning to limit the systematic investment plan (SIP, where like a recurring deposit investors invest a fixed sum every month) option only to those investors who have ECS and cheque payments are being discouraged.

Asset management companies say that as SIP application forms are accompanied by six or 12 cheques, some of these tend to get lost or misplaced and reconciling cheque numbers to accounts, collecting duplicate cheques, ensuring stop payment on misplaced cheques etc, are becoming very difficult.

In order to avoid this, SIP options are being restricted to investors who have ECS facility. The recently launched Birla Top 100 fund, for instance, allows only the first payment for SIP to be made through cheques, all other instalments have to come through ECS.

However, contradicting this, banking sources say that there has been no marked increase in the number of `stop payment' orders they are receiving. Fund houses are also reluctant to share information about the number or percentage of lost or misplaced cheques.

Industry watchers aver that as SIPs have increased in popularity with retail investors, fund houses and registrars are finding it difficult to handle the paper work involved and are using the `ECS only' mandate to make their internal operations easier.

While AMCs say that the cheque-handling problem is especially true for investors in non-metro or remote locations, ironically these are the same regions with lower penetration of ECS facility.

This is the second bit of bad news to hit investors in SIPs. Last month, several fund houses started levying entry loads on SIPs. While asset management companies attribute this to their requirement of keeping distributors happy, investors are increasingly questioning the need to pay 1-2.25 per cent of their investments every month to the fund house.

Since most SIPs are usually bought for six months to one year, distributors do not have to actively sell these to existing investors, month on month. Further, exit loads charged on early termination of SIPs are also higher thereby inherently discouraging investors from taking their money elsewhere. Despite this, fund houses are choosing to pay brokerages to distributors in their bid to outdo one another in terms of compensating distributors.

SIPs have proved to be successful in generating retail investments because of the convenience of investing a small amount every month. Fund houses have to keep distributors happy in order to sell other funds and schemes and paying brokerages on SIPs is an easy option out, conceded the chief executive officer of an AMC.

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