Share of direct MF plans have plateaued out over the last three years

BL Research Bureau

In the AMFI annual summit recently, SEBI Chairman Ajay Tyagi had stressed the need for AMCs’ (asset management companies) to promote direct plans under mutual funds. Data over the past four to five years, suggests that there is indeed a need to increase awareness and push direct plans, particularly to retail investors, who can gain from the higher returns under such plans.

A look at the data compiled from AMFI suggests that the share of direct plans in the overall AUM (assets under management) has been growing at a slow pace over the last three years. From 41 per cent in August 2016, share of direct plans in overall AUM has only inched up by two percentage points to 43 per cent as of August 2019. In fact, the slight uptick in 2019, has come after two years of stagnancy--- in 2017 and 2018, the share of direct plans remained at 41 per cent.

Direct vs regular

Mutual funds have traditionally been sold through advisors who get paid a commission from the mutual fund house. The commissions are deducted as expenses from the schemes’ NAV which in turn reduce the return made by investors in the scheme.

Starting January 1, 2013, the market regulator mandated mutual funds to launch ‘direct’ plans for all schemes. Investors got the opportunity to buy schemes directly from mutual fund companies at lower costs (expense ratio). Under direct plans, the commission paid to intermediaries is excluded from the expenses charged to investors, thus causing a difference in the expense ratios. This results in direct plans earning higher returns than regular plans.

Banks and corporates hop on the bandwagon

Within a span of 15 months since the launch of direct plans, the share of direct plans in overall AUM climbed to 35 per cent as of March 2014. Corporates and banks were the first movers, investing around 51 per cent and 82 per cent respectively of their investments through the direct route by March 2014.

Over the past five years, corporates have continued to invest more through the direct route—share of direct investments in their overall AUM at 70 per cent as of August 2019. Interestingly though, the initial eagerness among banks to invest through the direct route-- in particular for equities-- has fizzled out over the past three years. From 90 per cent in August 2014, share of direct investments of banks in their overall equity AUM fell to 34 per cent in August 2018. It inched up to 63 per cent in August this year, though still lower than the peak levels in 2014 and 2015.

One possible explanation for this trend could be that banks as a parent company are investing through their AMC subsidiaries.

Retail/ HNI investors drag their feet

Retail and High Net-worth Individual (HNIs) have been slow in adopting the direct route. As of March 2014, the share of direct AUM for retail and HNI investors was only at 10 and 12 per cent respectively. It barely rose to 12 and 21 per cent respectively, as of August 2019.

Most of the HNIs and retail investors still prefer the distributors channel while investing in mutual funds. Lack of awareness among retail investors has been one of key reasons for them to stay away from the direct route. 'MutualFundSahiHai’ campaign by the industry body AMFI and product awareness campaigns by market participants have motivated more retail investors to embrace direct plans. However, the direct route is recommended only for savvy investors who are aware about the market and its dynamics.

Demonetisation hit the retail direct share

When the demonetisation was announced in November 2016, the only category impacted badly was direct retail investors. They pulled out investments worth about Rs 12,000 crore, nearly a third of their AUM as on October 2016. This led to share of retail direct AUM shrink to below 9 per cent levels in the following months.

In contrast, retail investors through the distributor route invested about Rs 4,200 crore in November 2016. The notable fall in share of direct AUM, post demonetisation, took a long while to recover. Hence for retail investors, the growth in direct AUM remained sluggish in the year following demonetisation.