Going “direct” to mutual funds is increasingly becoming a six letter enigma. The investor has it in his play area, the media plays it up and the distributors think it is not a level playing field anymore.
This is a phenomenon which has been around over the last couple of years and while all stakeholders have been waiting for it to play out with gusto for the retail investor, it has thrown up its share of surprises.
- All investments coming in through the Direct Plan criteria amount to Rs 4,70,479 crores (December 2015) out of the overall industry AUM of Rs 13,39,197 crores. That is a sizeable 35% which has just come out of nowhere, so to say, in the last few quarters.
- Out of the Direct Plan AUM, around Rs 4,35,000 odd crores is in the fixed income and arbitrage segments, which have traditionally been patronised by large investors and treasuries who are extremely savvy. They have not just gone direct, but have reduced the direct plan expense ratios to unsustainably low levels in quite a few cases to wring whatever benefits they can in terms of returns. The AUM-driven industry has obliged.
Enter more power to the institutional sales teams of AMCs, exit institutional distributors. Quite a few of them have switched fields – an unintentional fallout of the Direct Plan.
- In the equity segment, there has been a sizeable jump in individual investors into Direct Plans. One will need to qualify it with the fact that around Rs 9,300 crores of equity AUM has been added to the tally by an industry player who tagged investors under the “Abandoned ARN” criteria into the Direct Plan.
- A lot has been written about the cost differential between Regular and Direct. If one were to just look at the costs associated with Regular Plans, one would find that there has been an unbelievably sharp drop of 80% cost from what the investor would have paid 20 years ago.
Surprised? Look at the costs which the investor does NOT pay today:
a) Scheme issue expenses of 6%. Remember the NAVs of funds opening at around Rs 9.40?
b) Entry loads of up to 2.50%.
So an investor investing Rs 10 into mutual funds earlier would have invested only around Rs 9.15 into the market. Today, the entire amount gets deployed.
Incidentally, the income for the AMC has not changed dramatically for the industry as a whole in this period, but the costs to the investor have.
Considering this, I find the argument to skip a Regular Plan underwhelming.
- Finally, let us come to the retail investor. Most definitely, there have been some investors who have shifted assets to Direct Plans – price being the motivator. However, let us consider the following:
a) According to a recent survey, only 14% of Indians are financially literate. The thought that people don’t create wealth, and indeed lose money because they are unaware, rather than unintelligent, is scary.
There are lots of investors who invest based on “rankings” rather than the more consistent “ratings”. This is prone to them having a bad experience eventually, which is what we really don’t want them to have. A decisive argument is made on this by Hansi Mehrotra in her article “Why good mutual fund research is hard to find”.
b) If price was the only motivator, then how come retail has not flocked to ETFs? They are the cheapest access to equity markets, but even the RGESS came across as a damp squib.
The truth on Direct Plans is somewhere in-between.
Personally, I believe the investor should be empowered to make a choice, provided he is aware of what he is getting into, and is financially literate enough to take decisions. With around 2.5-3% of the GDP coming in through individual investors in mutual funds, it makes this whole task onerous – with the onus shifting completely on to the AMC, which is ill equipped to handle any investor beyond an investment into their own schemes.
The larger issue is that investors are unwilling to pay for the advice they get, because they don’t respect (I deliberately eschewed the word “appreciate”) the value they get from an adviser.
One simple solution could be to have a Registered Investment Adviser (RIA) of investor’s choice tagged on compulsorily to each investment which comes into Direct Plans, irrespective of size of investment, for a period of 6 months. This would at no cost to the investor for the initial 6-month period and would serve two purposes:
1) Ensure that the investor is handheld throughout the journey at no cost to him and there are no surprises for him.
2) The RIA fraternity, which is currently struggling to survive, will get a shot in the arm – not to mention the respect they deserve.
I am confident that a 6-month coupling between the investor and the RIA will be the start of the investor’s journey into smart financial planning and wealth creation – and the investor more often than not, would be willing to start paying a fee to the RIA at the end of the 6-month period. Not to mention that “advisory” as a category will blossom with more and more talent coming in. It’s a new kind of “Free Look Period” of 6 months being given by the RIAs to the investor and to my mind would be a ‘win-win’ situation.
The ball has been set rolling and it sets the stage for interesting times ahead. All stakeholders need to adapt, not from a point of view of accommodating regulations, but from a point of view of what is best for the investor.
The views expressed by the writer are personal and do not necessarily reflect the views of the organization he represents.
