Concerns that mutual fund distributors will be out of business following the Securities and Exchange Board of India's (Sebi) decision to provide a separate plan for direct investing are exaggerated, said mutual fund industry heads on Thursday at the Business Standard Fund Cafe 2012. They added that distributors will continue to be a vital link between the asset management company (AMC) and the investor.
“Over a period of time, investors will realise that the cost benefit is not even worth it,” said Milind Barve, managing director, HDFC Mutual Fund. ”It might take a little time, but it is clear that investors would ask for advice on the plethora of products and plans which they don't understand.”
Sundeep Sikka, CEO, Reliance Mutual Fund, said: “We have in excess of 300 equity schemes. There will always be a need for which investors will keep coming to the distributor. Distributors are undermining their position; they are in a far stronger position then they think.”
In order to incentivise direct investing, Sebi, in August, had directed AMCs to provide separate plans for direct investing. Such plans, which will come into effect from January next year, will lower the expense ratio and separate net asset values (NAVs).
According to estimates, investors will be able to save between 50 basis points (bps) and 70 bps if they invest directly in mutual fund schemes, as they will save on distribution expenses and commissions.
Distributors are worried about investors opting for direct investing. “If any product is costing less if one buys directly from the manufacturer, why would somebody come to a dealer?” asked Dhruv Mehta, chairman, Foundation of Independent Financial Advisors.
Mutual fund executives, however, believe there is a lot of value-added services that distributors offer, which will lure investors. “There is clearly a relationship between the investor and the distributor. Two important services that distributors offer are research and housekeeping, be it redemptions, giving statements or changing bank accounts or nomination,” said R Venkataraman, managing director, IIFL.
Venkataraman believes there could be some discontinuity when it comes to inflows from institutional investors, but retail and high net worth individuals (HNIs) will continue to invest through the distributor model.
Currently, less than 10 per cent inflows into mutual fund schemes happen through the direct route.
Sebi had incentivised direct investing during the entry load regime as well, but it had made hardly any difference to market dynamics. However, things might be different this time around, said distributors. They pointed out that two NAVs for the same scheme might attract investors towards the more economical option.
Earlier, distributors used to pocket 250 bps of entry load as commission. After the abolishment of entry load, AMCs started paying 100-150 bps in commissions to distributors from their own pocket, after inflows into equity schemes started dwindling.
“Let's face it. The distribution fee or the fee that the investors will pay as an advisory fee is likely to be less than the what manufacturer (pays). That, for me, is the more commercial challenge,” said Barve.
