The Securities and Exchange Board of India?s move to make it mandatory for mutual fund houses to launch direct plans in existing as well as new schemes is likely to benefit investors, but it will eat into the income of distributors as no commission will be paid for such plans.
?It will pose a serious impediment to the development of intermediaries in the long run as informed investors will gravitate towards direct plans,? said Dhirendra Kumar, CEO, Value Research, a firm that tracks mutual funds. Currently, around 5-8% of the business is done direct, say industry observers. According to Kumar, the bigger distributors who exclusively cater to institutional clients in the debt space will be the first to get impacted.
These big distributors include several private banks, but market observers feel that these will mostly remain unaffected as they have a sizeable retail client base and don?t focus on institutional clients. Experts, however, point out that, over time, banks may have to shift to an advisory model to cater to HNIs, who are likely to move to direct plans.
IFAs are also likely to suffer. ?Shrewd investors may take advice from us and invest directly,? said Pranav Mazumdar, one of the promoters of Next Advisors, a body of independent financial advisors. For instance, he says, there could be a situation where an investor wanting to invest R1 lakh might put in R10,000 through an IFA, but invest the remaining R90,000 directly.
?Even uninformed investors requiring advice may choose to go direct to save on costs, with the result that many of them may end up with lemons in their portfolio,? said Srikanth Meenakshi, director, FundsIndia.com, an online MF platform.
He added that the forced creation of a direct plan could create unnecessary conflict and competition between manufacturers and distributors.
Since no commission is paid to the distributor under direct plans, they will come with a lower expense ratio. However, as yet, there is no clarity on how the difference in the expense ratios between direct and existing plans will be worked out. ?Assume a fund house currently charges 2.5% as expense ratio for a scheme. If, say, the 1% distribution charges are done away with, does that mean the direct plan will have an expense ratio of 1.5%?? asks a distribution head of a small fund house. Experts believe that 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 Kumar, the gap in expense ratio for equity schemes could be anywhere between 75 bps and 100 bps, a significant enough difference to lure savvy investors. The difference for debt products, on the other hand, might be 10-15 bps, say experts.
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 recent 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.