 "Direct plans gaining prominence")
Ever since the capital market regulator Securities and Exchange Board of India (Sebi) introduced direct plans for mutual fund investments, there has been a substantial uptick in transactions through this route, given the cost savings.
In a direct plan, investors do not need to go through an intermediary like a distributor or a financial planner for investing in a mutual fund scheme. They can either approach the fund house's branch directly or can initiate transactions through online mode, subject to meeting the necessary Know Your Customer (KYC) requirements. In direct plans, since the expense ratio is lower compared with their regular schemes, investors benefit.
For example, if a regular equity scheme charges expense fee of 2.25 per cent, its direct plan's expense charges would be around 1.25-1.5 per cent. Similarly, if the expense fee is 0.4 per cent in a regular liquid scheme, its direct plan would have 0.10 to 0.20 per cent as expense charges. The expense ratio is a measure of what it costs an AMC (asset management company) to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average value of its AUM (assets under management).
Since nearly 65 per cent of the mutual fund industry's assets of Rs 15,63,177 crore as on August 31, 2016 are in the debt and liquid categories - the segment where institutional investors and corporates have a dominant presence - large investors were quick to shift from regular to direct plans as the savings are huge. For instance, even a 10 basis points saving on say Rs 1 lakh crore of assets under management (AUM) would translate into Rs 100 crore in annual gains for these large investors. Not surprisingly, nearly 65 per cent of assets in the liquid and money market segment have come through direct route. In the debt-oriented segment, 44 per cent of the AUM is through direct plans.
On the other hand, the equity segment dominated by retail investors had direct investment contribution of a mere 14 per cent. In pure retail category, only 11 per cent of the assets have come directly, while the high net worth investors (HNI) category witnessed 16 per cent contribution through direct route.
Dhirendra Kumar, chief executive officer of Value Research, says, "All those who can invest by themselves are better off doing so in direct plans because the benefits start from day zero. Ideally, the (expense ratio) difference between direct and regular plans should be at least 75 basis points. In many cases it is lower because Sebi mandates expense fee in regular plans, but there is no guideline for the expense ratio of direct plans."
Though low, despite direct equity plans being in existence for nearly four years now, 14 per cent is a sizeable chunk. Further, direct plans in equity is largely an urban phenomenon wherein informed retail and HNI investors who are tech savvy have opted for it. Otherwise, a large part of the retail market is still going through the traditional mode which is through a mutual fund advisor-cum-distributor.
According to Kaustubh Belapurkar, director of fund research, Morningstar Investment Adviser India, "Traditionally, retail investors have preferred to invest through advisors because they lack knowledge on which funds to choose, how much to invest, among others. So, they don't mind paying the higher expenses, as long as they get advice. And, investing through an advisor is operationally easier and investors can get services like consolidated portfolio statements."
However, industry officials acknowledge that there is an increasing shift towards direct investments in the retail and HNI space too. This has led many fund houses to provide online transaction facility and mobile-based applications to prospective investors. Meanwhile, introduction of e-KYC is also likely to push direct investments. Till recently, physical KYC was a major hurdle for investors to on-board mutual funds online.
Another reason for rising trend of direct investments - though slowly but steadily - is the fact that the average tenure of holding period (or systematic investment plan maturity) given by investors at the start of investment has clearly shown a big leap. Against a tenure of one to three years seen till a few years back, the period of investment has risen to as high as 10-20 years. As the tenure is rising and investors are maturing through several investor awareness programmes, customers are taking into account what they lose out if they opt for regular plans. For a one-three years period, the amount may not be very large; but in 10-20 years nearly 75-100 basis points difference in expense fees can make the maturity sum much larger than what it would have been if the regular plan were chosen.
In addition to this, registrars like CAMS and Karvy, too, have facilitated investors to use their online platforms - desktop as well as mobile applications - with ease and convenience. Industry experts estimate nearly 15,000 transactions online on a daily basis in the mutual fund sector. And the trend is likely to gain momentum going ahead.
With the improvement in technology, investments in mutual funds are nearly paperless. Opening a systematic investment account online is a few clicks away, and so are additional purchases or redemptions. With rising internet penetration in the country, the online/direct transactions in the fund industry will only rise.
In a direct plan, investors do not need to go through an intermediary like a distributor or a financial planner for investing in a mutual fund scheme. They can either approach the fund house's branch directly or can initiate transactions through online mode, subject to meeting the necessary Know Your Customer (KYC) requirements. In direct plans, since the expense ratio is lower compared with their regular schemes, investors benefit.
For example, if a regular equity scheme charges expense fee of 2.25 per cent, its direct plan's expense charges would be around 1.25-1.5 per cent. Similarly, if the expense fee is 0.4 per cent in a regular liquid scheme, its direct plan would have 0.10 to 0.20 per cent as expense charges. The expense ratio is a measure of what it costs an AMC (asset management company) to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average value of its AUM (assets under management).
Since nearly 65 per cent of the mutual fund industry's assets of Rs 15,63,177 crore as on August 31, 2016 are in the debt and liquid categories - the segment where institutional investors and corporates have a dominant presence - large investors were quick to shift from regular to direct plans as the savings are huge. For instance, even a 10 basis points saving on say Rs 1 lakh crore of assets under management (AUM) would translate into Rs 100 crore in annual gains for these large investors. Not surprisingly, nearly 65 per cent of assets in the liquid and money market segment have come through direct route. In the debt-oriented segment, 44 per cent of the AUM is through direct plans.
On the other hand, the equity segment dominated by retail investors had direct investment contribution of a mere 14 per cent. In pure retail category, only 11 per cent of the assets have come directly, while the high net worth investors (HNI) category witnessed 16 per cent contribution through direct route.
Dhirendra Kumar, chief executive officer of Value Research, says, "All those who can invest by themselves are better off doing so in direct plans because the benefits start from day zero. Ideally, the (expense ratio) difference between direct and regular plans should be at least 75 basis points. In many cases it is lower because Sebi mandates expense fee in regular plans, but there is no guideline for the expense ratio of direct plans."
Though low, despite direct equity plans being in existence for nearly four years now, 14 per cent is a sizeable chunk. Further, direct plans in equity is largely an urban phenomenon wherein informed retail and HNI investors who are tech savvy have opted for it. Otherwise, a large part of the retail market is still going through the traditional mode which is through a mutual fund advisor-cum-distributor.
According to Kaustubh Belapurkar, director of fund research, Morningstar Investment Adviser India, "Traditionally, retail investors have preferred to invest through advisors because they lack knowledge on which funds to choose, how much to invest, among others. So, they don't mind paying the higher expenses, as long as they get advice. And, investing through an advisor is operationally easier and investors can get services like consolidated portfolio statements."
However, industry officials acknowledge that there is an increasing shift towards direct investments in the retail and HNI space too. This has led many fund houses to provide online transaction facility and mobile-based applications to prospective investors. Meanwhile, introduction of e-KYC is also likely to push direct investments. Till recently, physical KYC was a major hurdle for investors to on-board mutual funds online.
Another reason for rising trend of direct investments - though slowly but steadily - is the fact that the average tenure of holding period (or systematic investment plan maturity) given by investors at the start of investment has clearly shown a big leap. Against a tenure of one to three years seen till a few years back, the period of investment has risen to as high as 10-20 years. As the tenure is rising and investors are maturing through several investor awareness programmes, customers are taking into account what they lose out if they opt for regular plans. For a one-three years period, the amount may not be very large; but in 10-20 years nearly 75-100 basis points difference in expense fees can make the maturity sum much larger than what it would have been if the regular plan were chosen.
In addition to this, registrars like CAMS and Karvy, too, have facilitated investors to use their online platforms - desktop as well as mobile applications - with ease and convenience. Industry experts estimate nearly 15,000 transactions online on a daily basis in the mutual fund sector. And the trend is likely to gain momentum going ahead.
With the improvement in technology, investments in mutual funds are nearly paperless. Opening a systematic investment account online is a few clicks away, and so are additional purchases or redemptions. With rising internet penetration in the country, the online/direct transactions in the fund industry will only rise.