Institutions may shift to direct investment route in MFs

Large financial distributors may take a hit in commissions if their institutional clients, mainly corporate houses and financial institutions, opt for the direct route for investment in mutual funds (MFs). Earlier this month, capital markets regulator Securities and Exchange Board of India (Sebi) had decided to have a lower expense ratio for direct investors.

Indian companies and banks largely invest in debt funds of the mutual fund industry, in particular, liquid, liquid-plus and short-term funds, which make up close to 40 per cent of the industry's overall assets. The expense ratio currently in these funds range between 15 basis points (bps) and one percentage point.

“The direct route is likely to gain momentum, as all these bulk investors may save 5 bps to 10 bps, which will turn out to be a substantial big chunk,” says the chief executive officer of a mid-sized fund house. According to him, institutional clients are well-informed investors and may not need advisory help from their wealth managers or distributors.

Agrees Vikas Khemani, president and head-institutional equities of Edelweiss Securities. “Lower expense ratio in the direct investment route will take a pie out from the distributors' revenues.”

Corporate groups, such as the Tatas and Birlas, have their own in-house advisories. Those who do not have such advisories invest through brokers. “These institutional investors, which do their own research, will naturally look for the most efficient way of investment and prefer to save their outgo by investing directly with us,” explains the chief marketing officer of a large fund house.

Information technology major Wipro, telecom giant Bharti Airtel and Cairn India, among others, are the entities which will prefer investing directly rather than shelling out more money to distributors, say industry executives. Even a direct investment of Rs 100-250 crore will help them save Rs 5-15 lakh, they add.

According to Dhruva Chatterji, senior research analyst at Morningstar India, “Institutions are bulk investors on the debt side. They may shift to the direct route and distributors may get a hit.”

Moreover, experts fear the high net worth investors (HNIs) segment will be another set of investors who may like to invest directly, especially in equities. “Any investor having investment in excess of Rs 10 lakh will gain if he opts for the direct investing route,” added a chief executive.

However, they said retail distributors will be the least hit, as retail investors do not do research and may continue to depend on advisers. Commission earned by large mutual fund distributors in the previous financial year stood five per cent higher at Rs 1,860 crore, against Rs 1,770 crore in FY11.