To lose commission if institutional investors switch over
With the deadline drawing near for implementing direct plans, mutual fund distributors are a worried lot as they believe that a host of institutional clients might switch over to these plans. Even savvy retail and HNI clients might opt for direct plans sooner or later, they believe. This exodus will adversely impact distributors as no commission will be paid for the direct plans.
“There is a feeling that the large and bulk investors on the institutional side will switch to direct plans to save on commissions,” said Dhruva Chatterji, senior research analyst, Morningstar India, adding that the impact of the change will be more acutely felt by distributors who focus on institutional clients that invest in fixed income schemes. According to industry observers, institutional investors can save about 40-50 basis points on commission if they choose to go direct.
Not every distributor is losing hope. “Investing in fixed income schemes is not that easy and I believe that treasury desks of companies will continue to depend on distributors that are able to offer solid, independent advice. So, distributors who cater to institutional clients, but follow an advisory model, will survive,” said Sunil Jhaveri, founder, MSJ Capital & Corporate Services.
Of the R7.68 lakh crore of assets managed by the Indian MF industry as on October 31, 2012, R5.47 lakh crore, or 71%, was contributed by income and liquid/money market funds, as per data put up by Amfi. It is estimated that more than 90% of money for liquid funds and ultra short-term debt funds comes from institutional investors.
Investors, especially retail and high net worth individuals (HNIs), who invest in equity funds stand to benefit hugely from the difference in expense ratio if they go direct. According to market participants, the impact of this lower expense ratio on the NAV will be minuscule in the initial stages, but will become significant after a year or two. According to estimates, the gap in expense ratio for debt schemes might be 10-15 bps while that for equity schemes might be 75-100 bps, a significant difference for long-term investors.
Industry observers say the number of HNIs migrating to direct plans will depend on the difference in the NAV between direct and normal plans. “If the difference is less than 30 bps, the impact will be minimal. But if the difference is more than 50 bps, a lot of HNIs will migrate to the direct plans,” said K Ramesh Bhat, president, IFA Galaxy, an independent body of financial advisors. “We have been talking to a lot of fund houses and they say the difference would be somewhere between 30 bps and 50 bps.”
AMCs have been asked to provide a separate plan for direct investments in existing as well as new schemes by January 1, 2013, as per the Sebi circular.
It further states that such a separate plan shall have a lower expense ratio, excluding distribution expenses and commission, and no commission shall be paid from such plans. The plan shall also have a separate NAV.
Winds of change
* Institutional investors can save about 40-50 basis points on commission if they choose to go direct
* Institutional investors invest more than 90% of money in liquid funds and ultra short-term debt funds
* HNIs will migrate to direct plans if difference in NAV between direct and normal plans more than 50 bps