Mumbai: The mutual fund (MF) industry’s worst fears seem to be coming true: Distributors are not finding it worth their while to service small investors who, in turn, are either buying units online or directly at MF outlets.
But volumes have suffered. Investors bought 40% fewer MF units in August, the first month after India’s capital markets regulator told asset management companies (AMCs) to stop taking out a slice of investor money to pay MF distributors rather than invest the full amount in shares and bonds.
Graphics: Ahmed Raza Khan / Mint
The industry had said that this move would leave distributors with no incentive to service small investors.
The number of units sold dropped even as the overall assets managed by MF companies rose by about 4% to Rs7.5 trillion, according to two registrars, Karvy Computershare Pvt. Ltd and Deutsche Investor Services Pvt. Ltd.
These two and Computer Age Management Services Ltd serve all AMCs except Templeton Asset Management (India) Pvt. Ltd, which has an in-house registrar.
A registrar to an MF deals with investors and manages paper work.
“Over the last few weeks, we had been tracking the volume of investments. For funds serviced by us (Karvy), we notice that there has been a dip in the transaction volumes by about 40%,” Karvy Computershare said last week in an industry analysis circulated among AMCs it serves.
According to the report, daily transaction volume of purchases has come down in August against average transaction volumes of the previous three months—May, June and July.
Samir S. Dhamankar, head (registrar services) at Deutsche Investor Services, too, said, “There is definitely a short-term impact on business, and more in the retail area.”
The Securities and Exchange Board of India had said in June that MFs cannot charge the investors any upfront commission from August. So far, investors were charged up to 2.25% of their investment in equity schemes in the form of “entry load” and this money was used to pay commissions to distributors.
With the abolition of commissions, distributors have stopped chasing investors. They are focusing more on high networth individuals (HNIs) whom they can charge fees for selling financial products and offering investment advice.
Small investors are increasingly investing in MFs directly through online channels or actually dropping investment applications at collection centres run by AMCs.
The number of direct applications as a percentage of total applications has gone up from an average of 10.58% between May and July to 16.54% in August. In terms of value, however, contribution of direct applications has gone down from 11.03% to 8.48%.
“It appears that small ticket investors are investing directly (as application count increased) and distributors are concentrating their business on big ticket investments (HNIs),” Karvy says.
Nilesh Shah, deputy managing director at ICICI Prudential Asset Management Co. Ltd, which manages Rs77,966 crore, said, “August numbers have been bad. But it’s too short a period. Already people have begun adjusting. Some distributors have started charging transaction fees from investors. We need another month-and-half to get a clearer picture of how things evolve.”
Rajan Ghotgalkar, MD at Principal PNB Asset Management Co. Pvt. Ltd, which manages Rs9,450 crore in assets, said, “There is certainly an impact of 35-40% on the inflows.” A large part of the inflows is through systematic investment plans (SIPs) in which an investor buys MF units for a certain amount at periodic intervals. The inflow of retail money would have been hit even more had there been no SIPs.
Industry body Association of Mutual Funds in India is yet to release inflow data for August.
Sunil Shetty, vice-president (mutual fund–advisory) at LKP Securities Ltd, a Mumbai-based brokerage, said some firms that had MF distribution as an ancillary business have closed down their offline sales model and moved fully online.
Arun Jethmalani, MD at ValueNotes Database Pvt. Ltd, a Pune-based research firm, said, “It was bound to happen. I would be surprised if it didn’t fall. A lot of distributors are trying to push products with loads and not sell no-load products. But they can’t do this for long. In the long run, growth has to come from volumes.”
Anil Rego, CEO at Right Horizons Financial Services Pvt. Ltd, a Bangalore-based wealth manager, said, “It’s unfortunate that when markets have begun to see new highs, the retail investor is not being serviced.”