MF institutional distributors feel direct plan pinch

Mutual fund distributors servicing institutions are a worried lot as companies and banks are increasingly sidestepping these intermediaries while parking their idle cash in short-term debt schemes. Since the introduction of the direct plan on January 1, which allows investors to put money directly in schemes and help reduce costs, companies and banks have routed Rs 40,000 crore to Rs 50,000 crore worth of investments in liquid schemes through direct plans.

This has resulted in many distributors scaling down their institutional business, while many are changing their business model to advisory, where clients pay for product recommendations. A leading Mumbai-based distributor, known to service almost 1,000 companies, is speculated to have seen an employee exodus in recent weeks.

Banks and some large companies have already shifted to the direct plan facility, said mutual fund industry officials and distributors. Companies and banks usually invest in mutual fund liquid schemes to make the most of their surplus cash. Of the Rs 786,000 crore of assets under management of the mutual fund sector, about Rs 500,000 crore is in debt products. Investments from companies and bank treasuries account for 80-90 per cent of the money in these schemes.

As investments by institutions run into crores of rupees, even a few basis points reduction in costs makes a difference to their overall returns. Distributors said investors are saving on 8-10 basis points (one per cent equals 100 basis points) of fees following the switch.

“Boards of companies and banks are pushing for the direct plan to reduce costs,” said a top official with a private bank, requesting anonymity.

To ensure their transition to a direct plan goes ahead without any hitches, companies are recruiting executives from institutional distributors to handle the paper work and advice them on the technical aspects of the business.

“This is much cheaper, as hiring employees of distributors costs only a fraction of what is paid to distributors,” the bank official said.

Distributors are leaving no stone unturned to ensure their clients stay with them with many offering advisory services to these institutions.

“Finally, every distributor will have to think on those lines because only advisors will occupy a place,” said Sunil Jhaveri, chairman of MSJ Capital & Corporate Services, a New Delhi-based mutual fund advisor. “Product-pushers will be weeded out of the business,” he added.

A Mumbai-based mutual fund distributor feels it is just a question of time before companies and banks go back to their old plan from the direct facility.

“The groundwork required to invest regularly can be very tedious. Till recently, all this work used to be done by distributors who also share an excellent rapport with mutual funds. Once companies realise the practical difficulties, many of them will come back,” the distributor said.