Mutual fund investing platforms are witnessing a massive shift with fintechs entering the market. Nithin Kamath, CEO and co-founder of zero-brokerage stock trading platform Zerodha, which also offers direct funds through its arm Coin, talks about the transformation and the challenge of insufficient retail participation

How has the Indian broking industry evolved with the influx of fintech companies that have drastically changed the mode and method of investing?

While there has been an influx of fintech companies building mutual fund investment platforms, there isn’t much happening in the direct equity business. The reason for this is that it is a lot more challenging, both in terms of regulatory requirements and technology to offer trading and investing platforms. Also, the lower hanging opportunity is to first get people to invest in mutual funds, which is a better-suited product, than in direct equity.

We are lucky that today we are at the forefront and leading disruption both in terms of product experience and pricing in the broking industry. We have seen a significant shift in terms of how orders are placed—a decade ago it was mostly over the phone by calling a dealer—to over 70% on mobile apps today. There has been a gradual shift from a business that was typically driven by relationship managers pushing trade ideas to self-sufficient investors who want to learn and act on their own.

Mutual fund investing platforms are seeing a seismic shift. There are over 100 start-ups trying to move investors from purchasing mutual funds offline to online. Many of the online platforms are also shifting to direct plans where no commissions are earned for selling them from the AMC (asset management company)—a completely different business model.

What challenges do you see for the fintech industry and its investors in the future?

For intermediaries like us, the challenge is the extremely shallow retail participation in India. In the last year, less than 6 million retail investors invested directly in stocks and around 20 million in mutual funds. Also, most people who invest allocate much less into equity compared to other assets like real estate. Unless we are able to broaden this market, in a world where, thanks to disintermediation, the pricing power is coming down, it will be tough for businesses to scale up in terms of revenue.

With Paytm letting users buy mutual funds through Paytm Money, how is the space likely to change? How does Zerodha arm Coin measure up to other competing products?

I am extremely hopeful about Paytm Money. If anyone in India could quickly grow this market from 20 million to 30 million Indian investors, it is probably them because of their captive audience. As a product, I believe Coin, Kite and everything else in our ecosystem is a better proposition to the end user. Hopefully, a business like Paytm, us and the likes will bring in a new breed of investors to the capital markets and continue reducing dependency on foreign capital driving local markets.

Zerodha has done away with the 50 per month charge for investments of over 25,000 made through Coin. How are you able to provide your services for free?

When we started selling direct mutual funds on Coin with a monthly pricing model, we saw a significant drop in clients who weren’t used to paying a monthly fee. Most didn’t understand the benefit of huge savings made on direct funds against regular funds they were buying on other platforms. Also, the direct mutual fund industry was gravitating towards a completely free pricing model. Even though we had over 2,200 crore in direct MF investments by over 100,000 users processed through Coin, I think it would have been at least twice that if we were free from day one.

We have offered equity investing for free from late 2015, so going free on direct mutual fund investment wasn’t really a shift in the business ideology. The reason we are able to offer it for free is that we charge 20 per trade for people who trade intraday equity and futures and options. We are the largest retail broker by such trades in India. This is what generates revenue. So in a way, traders help subsidise investors.

We also sell direct MF in demat form. The settlement of this works exactly how it works for stocks. So, operationally, there is no additional overhead for offering direct mutual funds.

Are direct plans better as a rule? How much are people paying in hidden commissions when they opt for regular plans instead?

For a person who invests in mutual funds on his own, direct mutual funds is a no-brainer. Up to 1% per year (compounded daily so technically much more than 1% in a rising market, since expense ratio is applied at the end of every day) can be saved, which would have otherwise gone to the distributor.

Are direct plans right for everyone? What about investors who are not savvy enough to choose the right funds?

Direct plans are best suited for DIY type of clients. For someone who doesn’t know, I think the best option is direct mutual funds plus an advisor who charges for the service.

This is very similar to how a doctor works. You go for a consultation, he charges you for the service and gives you a prescription for medicines. But imagine if a doctor didn’t charge you for consultation, didn’t talk about how he makes money, and then earned from all the medicines sold. This model can very easily be misused by someone who is greedy.

But the problem in India with direct mutual funds and the advisory fees model is that people hate paying such fees, especially retail investors. With regular mutual funds, since they don’t see the money being paid out as commissions from their investments, they don’t care. But ask for money separately and you’ll realise how tough it is. So I don’t know if such a business model can be viable in the long run.

Zerodha has tied up with IDFC Bank to offer three-in-one accounts to its customers. What advantages will this provide?

The biggest issue for a non-bank brokerage firm like us is to provide a seamless experience between the bank and the brokerage account. With this tie-up, clients will be able to move money into the trading account without having to go through a payment gateway or wait for NEFT/RTGS when requesting for a withdrawal.

Fintech companies like Zerodha gained traction due to the ease of access they offered. Aadhaar had a big role to play in this through e-KYC. But now Aadhaar can no longer be mandated by private companies. Will that make a difference?

We never made Aadhaar mandatory to open accounts or account linking. Over 50% of all our new accounts still don’t use Aadhaar for KYC. With our current understanding of the (Supreme Court) verdict, as long as the option is with the client to use Aadhaar and if you are a regulated business, everything should remain the same.

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