Will the industry survive the 'Direct' attack?

Last Updated: Fri, Dec 07, 2012 21:00 hrs

pThree years after the game changing moves that put the focus on mutual fund investors the market regulator announced several changes to the mutual fund regime This time the Securities and Exchange Board of India Sebi appeared to have balanced these measures very wellppThe manufacturers of the product ie the fund houses were allowed to charge up to 20 basis points more across schemes The distributors would get a share of this increase so they were also supposed to be happy And then for the investor two major sops were offered First the clutter in the industry was to be removed by eliminating multiple plans in schemes Secondly the funds were asked to create a new plan under which investors can bypass the distributor and buy the scheme directly This elimination of intermediary was to result in a few basis points savings in the hands of the investorppNow while the fundhouses have happily lapped up the extra expenses by increasing charges with effect from October 1 they seem to be developing cold feet in executing the other half of the promise Instead of addressing technical issues that may arise and rolling out a definite roadmap for implementation of the direct plans for which the extra three months were given by Sebi some senior managers seem to be spending time in limiting the scope of these Direct plansppDistributors have gone a step ahead and submitted a memorandum to Sebi wanting to scrap the idea The distributors feel that the direct plan will lure investors away from them They believe that investors may take advice from distributors for about say 20 per cent of their portfolio and then replicate the advice for the remainingppAccording to a memorandum submitted by IFA Galaxy a distributors federation that functions online &ldquoMutual Funds as a concept was introduced to cater to those investors who are not savvy enough to make their own investments in equity markets While direct equity option is available for savvy investors through a huge network of stock broker and sub-brokers across the country what is the need for introducing a direct share class in Mutual Fund investment If an investor is savvy enough he would anyways prefer a direct equity investment Is this not defeating the very premise on which mutual fund investments were introduced&rdquoppThe distributors also argued that without proper guidance from the advisors investors will not be able to chose from 44 fund houses offering multiple schemes &ldquoHow would an investor make the right choice and decide on the right scheme for his investment among the maze of options available to him Under these circumstances would he not be confused and make a wrong choice If he loses his money due to his own wrong choice what are the chances that he would ever come back for a Mutual Fund investment in the future Are we not running the risk of losing an investor permanently On one hand an IFA does all the ground work and sources an investor on the other hand due to lack of guidance in doing a direct investment if he loses his hard earned money he would leave the system This would result in a leaking bucket situation How would this help in increasing market penetration&rdquo the memorandum saidppHowever Ajit Dayal chairman of Quantum Mutual fund which had done away with distributors years before Sebi announced the plan has a different view &ldquoAs India&rsquos first and only direct-to-investor mutual fund house we have always realised the potential of the low-cost direct plan of investments It will help the investors to save the additional cost they pay for the distributor&rsquos services We believe that the direct plan is one of the more positive steps that SEBI has taken for the benefit of investors Investors are known to do their research and know which funds they wish to invest in they do not need to unnecessarily pay large sums of money to distributors for filling in forms&rdquoppDayal points out how the costs are the only factor under the investors&rsquo control &ldquoInvestors must recognise that every fund house can have good returns at some point in time &ndash but returns are not known Costs are known and defined The lower the cost the more of the investor&rsquos money finds its way into the market to try and generate returns&rdquo he addedppWhile Sebi has said the direct plan has to have lower costs it has not given any specific formula to define how lower this should be and whether this should be uniform or funds can use their discretionppIndustry officials point out that the agenda papers published by Sebi indicated that the difference in costs between the direct plan and the one sold by distributors will be equal to the amount of selling expenses incurred by the fund house including distribution commission and marketing expensesppThis is Sebi&rsquos cleverly bowled googly say experts who have read the fine print &ldquoOn the one hand Sebi has allowed you to charge more and spend more on distribution especially in areas outside top 15 centres Now if under the direct plan you are going to exclude this entire additional expenditure it could create a huge differential which investors cannot ignore The dilemma for funds now is whether they can afford to put their meticulously built distribution networks on the guillotine&rdquo he saidppArjun Parthasarathyformer fund manager and editor of investorsareidiotscom also said &ldquoFunds do not want to displace the distributors Distributors get bulk of their incomes from servicing corporate and high net worth investors If they go direct many have to shut shop that is why they are fighting tooth and nail To some extent funds are also cagey&rdquoppDayal added &ldquowhile the direct plan might not adversely affect the economics of the industry as the money is anyways flowing in the real challenge here is how the AMCs will pacify the distributor in case a customer introduced by him makes additional investments into the direct plan&rdquoppPeople in favour of the proposal also point out that distributors have no reason &ldquoto grumble about the introduction of the direct plan as even earlier an investor could always go directly to the AMC regardless if he was introduced by any distributor or not&rdquoppWhile investors are allowed to invest directly there is no concession in charges in this modeppIndustry sources said that some top fund houses are proposing a move wherein the direct plan is limited to QFIs and such institutional investors whereas the corporates and HNIs and probably retail the community serviced by distributors does not get affected It is also learnt that discussions have happened in the industry lobby Association of Mutual Funds of India AMFI about restricting the scope of direct plan But it is not clear at what stage these proposals are and whether Sebi will entertain theseppDayal of Quantum is against any such move &ldquothe Indian Mutual Fund industry has traditionally been driven by the distributors While the AMCs might feel insecure about the interest of distributor in selling the mutual fund scheme with the introduction of the Direct plan we believe it may not be right to limit the direct plan option to only a few institutions or categories of investors and neglect the retail investors&rdquoppHe added that the industry should not focus on whom they are selling to but whether the industry is selling the right product to the investor or not Fund houses need to go back to the fundamental question of whether they are serving the investors&rsquo interests or not&rdquoppParthasarathy said even if the direct plan was introduced it would not result in a rush for funds &ldquounless market is doing well and investors see value&rdquo He pointed out small retail investments in mutual fund is not very high &ldquoBut people are familiar with the direct plan in the insurance sector They may start looking at the direct option provided it is as easy as operating a bank account&rdquoppThat may entail some costs points out Vijay Mantri CEO Pramerica MF &ldquoDirect selling also comes with some costs for the manufacturer in terms of putting up the necessary infrastructure&rdquo he said indicating that lower expenses may not mean &ldquovery low&rdquoppWhile the Direct debate rages on critics are also worried about the impact of the move to allow fund houses to charge an additional Total Expense Ratio TER up to 30 basis points if 30 per cent of their net sales take place beyond the top 15 cities 100 basis points make 1 per cent depending upon the extent of new inflows from locations beyond top 15 cities Claw back of additional TER if the investments are redeemed within a period of one yearpp&ldquoThis means that the total expense ratios for any money coming from other than the top 15 cities can be hiked to 28 per cent instead of 25 per cent for equity schemes which will thus reduce investor&rsquos capital returns This increase in costs is excluding the increase in TER allowed by SEBI which is also discussed subsequently &ldquoWe at Quantum believe that while it is important for the mutual fund industry to improve its geographical reach and bring in long-term retail money from smaller towns like any other businesses it should have been the AMC who bears their expansion cost rather than the investor paying additional TER SEBI&rsquos intentions behind this move are good but we are unsure if AMCs will use this additional amount to expand their penetration in the tier 2 and tier 3 cities diligently Moreover unnecessary branch opening by the AMCs in the race to garner assets as has been evidenced in the past may eventually lead to mis-selling for the schemes&rdquop

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