Mutual fund direct plans erode distributors' share

CRISIL report says the market share of these distributors has reduced to 43% in the past three years

Direct plans in mutual funds (MFs), which help investors bypass the distribution channel, have led to a drop in the market share of national distributors.

The market share, in terms of assets under management (AUM) serviced by these distributors, has reduced to 43 per cent in the past three years, says a report from CRISIL Research.

“A large portion of corporate clients of NDs (national distributors) have gone to the direct route of investment, which has led to lower market share,” said the report, titled 'Indian financial distribution industry at the cusp: Vision 2020’, launched at a distributors' seminar organised by Financial Intermediaries Association of India (FIAI).

FALLING SHARE

• AUM-based market share of distributors down to 43% as of March; could fall further to 34% in 2020, says CRISIL report
• Direct route for investment in MFs behind the decline in market share
• The route, introduced in January 2013, is popular among corporates, the largest client-base of NDs

“The direct plan route has hit national distributors in a big way. Business models set around corporate and institutional clients are over,” said Surajit Misra, executive vice-president & national head (MFs), Bajaj Capital.

Direct plans for MF schemes were introduced by the Securities and Exchange Board of India in January 2013.

Experts said direct plans were much more popular in the debt segment, particularly liquid schemes, which see very high participation from institutional and corporate clients. The distribution commission for liquid funds is much lower than for equity funds and other debt schemes but the amount of investment in these funds is much larger. The introduction of direct plans, aimed at reducing the commission burden on retail investors, has been a blessing for companies, able to save on distributor commissions which could run into lakhs or even crores of rupees a year.

“It is natural for corporates to choose the direct route. Of late, we are seeing a growing interest for direct plans even among our high net worth individual (HNI) clients,” said a senior official at a domestic national distributor.

The says the share of national distributors is expected to go down further, to 34 per cent by 2020. On the other hand, the AUM share of independent financial advisors (IFAs) has moved up to 28 per cent in the past three years and is expected to touch 33 per cent in 2020.

At present, the retail and HNI category of investors still prefer the indirect route, as they depend on distributors and IFAs for investment advice.

“We have seen a steady increase in retail and HNI participation in MFs in the past one year because market returns have improved,” said Sudhakar Ramasubramanian, chief executive of Aditya Birla Money and director of FIAI.

Banks, which form the third largest distributor group, accounted for about 30 per cent of the AUM share as of March 2015. By 2020, the MF distribution is expected to be split almost equally between the three primary distributors, with the share of IFAs growing the fastest, the report observed.