Investors flock to direct plans, save crores

Equity AUM of direct plans up 42% even as commission paid falls ~1,045 crore

Three years after the Securities and Exchange Board of India (Sebi)’s told mutual funds to offer direct plans, these seem to be bearing fruits. Smart investors, especially corporations and high networth individuals, are lapping these up, as they come without any intermediation and associated costs. As direct plans grew at a significantly faster pace than the broader industry, investors made significant savings in commission payments.

Sebi had in January 2013 asked mutual funds to offer such plans in all schemes. There would not be any distribution fees or trail fees paid to agents for such schemes. Because of this, expense ratios would be lower than regular plans. In the year ending March 2016, equity assets under management (AUM) in the direct channel went up 42 per cent to ~55,384 crore from ~38,932 crore. Across all schemes including debt, AUM from the direct channel went up from ~4.08 lakh crore to ~5.20 lakh crore, an increase of 27 per cent. In comparison, overall AUM of the industry grew at a much slower pace of 13.8 per cent to ~12.32 lakh crore from ~10.82 lakh crore. This has had an impact on the amount investors paid distributors as commission, say experts.

An analysis of Prime Database data on commission paid to 572 distributors by 40 AMCs showed there was a decrease in commission paid from ~4,704 crore in 2014-15 (FY15) to ~3,659 crore in FY16, a fall of 22.21 per cent.

Analysts feel this trend is likely to gather momentum in the coming years. Pranav Haldea, managing director, Prime Database, said, “A major reason for the fall in commission is the increasing popularity of the direct channel. This is likely to become stronger going forward.” N J India Invest was the largest distributor in FY16 having earned a commission of ~326 crore, followed by HDFC Bank (~261 crore), ICICI Bank (~170 crore), Kotak Mahindra Bank (~166 crore) and Darshan Securities (~160 crore).

HDFC Mutual Fund was the biggest paymaster in FY16 having paid a commission of ~586 crore, followed by ICICI Prudential (~476 crore), Reliance (~414 crore), Birla Sun Life (~364 crore) and Franklin Templeton (~305 crore).

Distributors said the movement towards direct channel is seen largely among larger investors such as corporations and HNIs. V Krishnan, president, Integrated Enterprises, said, “As far as mass retail is concerned, there is still no major shift towards the direct channel. These investors need handholding not only in choosing product but also in other aspects of managing the investment. It is the big transactions from corporates that has gone direct.” Distributors say other factors such as capping of upfront fee on closed ended funds at one per cent led to lower commissions in FY 16. Krishnan felt even if smaller investors take the direct route, “they will come back in a few months.”

Though distributors seek to play down the success of direct plans, an analysis of Prime Database data show there is a conflict of interest when MFs have in-house distributors as then such a distributor tends to and is incentivised to push schemes belonging to their group company, irrespective of whether these plans are good for investors. At the same time, certain MFs seem to rely heavily on their respective in-house distributors.