Selling mutual funds turns less attractive for advisors

Industry also seeing a decline in the number of new independent experts

Selling of mutual fund (MF) products is turning out to be less attractive for individual distributors, who play a key role in onboarding firsttime investors.

According to industry estimates, the number of new Amfi-registered numbers (ARNS) for independent financial advisors (IFAS) in the September quarter stood at 2,106.

This was 11 per cent lower than the previous quarter. Compared to the March quarter, it is 36 per cent lower.

Compared to the corresponding period last financial year, so far the MF industry has seen 60 per cent lower additions of new IFAS in the current financial year. ARN is a unique code allotted to intermediaries by the Association of Mutual Funds in India (Amfi).

Industry participants say that this trend is worrying, as it

could take a toll on the pace of equity flows and also hinder the penetration drive of the ~24-trillion MF industry.

“Apart from facilitating the process of bringing in new investors, IFAS also help in educating clients on the risk-return profile of various MF products,” said a fund manager.

IFAS say the reduction in incentives and over-regulation are making MF distribution a less attractive proposition.

“Not just large-sized fund houses, but even mid-sized ones have reduced their commission rates. Distributors are finding selling insurance products more feasible due to lower levels of regulatory intervention and high commission rates,” said Srikanth Matrubai, chief executive officer (CEO) of Srikavi Wealth.

In September last year, the Securities and Exchange Board of India (Sebi) reduced the maximum expense ratio — which fund houses charge on equity funds — to 2.25 per cent, from 2.5 per cent. Similarly, expense ratios were cut for most major categories.

As the new structure was aimed at passing economies of scale to investors, large-sized fund houses said they’d be passing on bulk of the expense cuts to the distributors. The practice of upfront commission was also scrapped, which earlier helped new and small independent distributors to absorb initial costs of acquiring clients.

However, experts say that there are other factors that could be contributing to the falling number of new IFAS.

“Direct investing has also gained some momentum on the back of digital platforms and fintech companies entering the fray,” said Dhirendra Kumar, CEO, Value Research.

Even as digital platforms have mushroomed in the last few years, experts say IFAS would be needed for deepening the penetration of the industry.

“The need for a high-touch model continues to be relevant, despite the rise of digital, especially in B15 and B30 cities as a large number of first-time investors enter the MF industry,” read the AMFI-BCG ~100-trillion vision document for the MF industry.

The overall penetration of MF products in India stands at 11 per cent (that is, share of MF assets as percentage of country’s gross domestic product).

Kumar added that IFAS also play an important role in helping investors hold onto their investments when markets are volatile.

“Besides getting investors to start their investment journey, IFAS also play the important role of dissuading investors to sell their investments out of panic, triggered by daily market volatility,” he said.

According to the AMFI-BCG vision document, there are only 230 ARNS per million households in beyond the top15 cities.