Share of MF assets under direct plans drops for the first time since 2013

The proportion of mutual fund (MF) assets held under direct plans dropped at the end of 2017-18 for the first time since 2013, when the mandatory direct category was introduced. 

Data from MF tracker Value Research reveals the share of direct assets, up from 15 per cent to 40 per cent between FY13 and FY 17, had dropped to above 38 per cent.

The drop comes amid mushrooming of online platforms, which allow direct investment into MF for free. Kuvera, Clearfunds, Computer Age Management Services (CAMS, a registrar and transfer agent), and Karvy Computershare are some of these. Beside, Paytm Money is set to launch operations.  

Such platforms allow individuals to invest directly with the asset manager and do not require distributor fee. Consequently, they have higher return because of lower cost.

Despite these advantages, the share of direct plans has fallen and the bulls might be the ones to be blamed. Equity schemes have lower direct participation than the debt schemes, said Dhirendra Kumar, chief executive officer (CEO) at Value Research.

Equity funds saw their assets under management (AUM) grow 48 per cent in FY18 on large inflow and double-digit return on the existing assets. The debt segment grew 6.31 per cent in the period. Direct plans are more prevalent in the debt segment, owing to the presence of sophisticated institutional investors. The growth of equity assets, dominated by non-direct investors, has, thus, led to the drop of direct plans’ asset share.

“They are disruptors,” said Kumar, referring to online platforms that provide free direct plans. He, however, added it was unclear how many of these would be able to make money in the long run. There are options such as MF Utility which also allow investors free transactions. It comes with the added trust-factor of being set up by the industry, he said. MF Utility already has more than a dozen online platforms that make use of it to carry out transactions, a sector official said. An e-mail to MF Utility did not elicit any specific reply on the number of tie-ups.

Jimmy Patel, managing director & CEO at Quantum Asset Management Company, said investors still required a great deal of education on how mutual funds work, before they evolve enough to adopt direct plans in a big way.  “The platform can act as a means for executing the investment. But, investors will still be required to be brought to the table,” he added. One model, for example, allows online platforms free transactions in direct plans up to a limit. Others offer free, automated advisory services. 

“The awareness level is increasing drastically,” said Kunal Bajaj, founder & CEO of Clearfunds. He observed while people were not willing to pay a big amount as advisory fee, they would be willing to spare the smaller amounts the platforms charge. This makes it viable for firms such as his that use automated robo-advisory services and do not hire financial advisors to chalk out portfolios for individuals. He believes such personalisation might be required for only certain customers. Dhirendra Kumar said independent financial advisors and distributors might be adversely affected by such low-cost offerings, though investors might benefit. With big players like Paytm yet to launch, direct plans could well receive more of a boost in future.