Distributors gain as direct mutual fund investment platforms lose steam

Just 4% growth in registration of direct plan SIPs last year after 115% growth in 2021

After growing exponentially for a few years, direct mutual fund investment platforms entered the slow lane in 2022.

The year-on-year growth in new systematic investment plan (SIP) registrations through direct plans came in at just 4.5 per cent in 2022 compared to 115 per cent in 2021 and 505 per cent in 2020. In comparison, SIP registrations via regular plans rose 19 per cent last year. It was the first year since 2020 when the growth in direct plan SIP registrations trailed that of the regular plans.

MFs’ direct plans are a low-cost option where investors do not have to pay any commission. There are many fintech platforms like Groww, Zerodha, Paytm Money, and Kuvera that allow investments in direct plans. MF houses also allow direct investments through their apps and websites. Regular plans, on the other hand, are sold by individual MF distributors, banks, and even some fintech players. Anyone selling regular plans of MFs gets commission.

The industry believes that the growth seen in direct plans in 2020 and 2021 was not sustainable as a lot of factors worked in favour of fintechs in the post-Covid period. There was a strong market rally; the direct investor base was low; and fintechs were flush with funds, allowing them to market themselves aggressively. In 2022, they lost some of these advantages. On the other hand, individual MF distributors were able to work more freely in 2022 as there were no restrictions on physical movement unlike 2020 and 2021.

“Last year, individual distributors were more active as Covid-related restrictions were over. From the investor’s perspective also, the market situation was more conducive to seek help from professionals rather than trying to do it on their own,” said G Pradeepkumar, CEO of Union Asset Management Company.

Bhuvanesh R, assistant vice president-business, Zerodha, said growth was still higher than in the pre-pandemic times for direct plans in absolute terms. “Early in the post-pandemic period, markets were delivering returns on a continuous basis. People also had a lot of savings. Now the situation has changed a lot. So, obviously, that kind of growth won't happen” he said.

Others point towards fintechs’ focus shifting away from selling direct MFs and investors’ need for guidance during a volatile market.

Stock broking is a more lucrative business for investment platforms as it generates revenue unlike distribution of direct plans. This was the reason why Paytm Money migrated its MF business from a Registered Investment Advisor (RIA) licence to stock broking licence in 2022. Since this move entailed MF investors getting a demat account, the move is likely to have helped the company cross-sell stock trading to its MF customers.

“Fintechs were spending millions of dollars in marketing to gain market share in direct MF distribution earlier but now that focus is on unit economics, the focus has shifted to other revenue-generating verticals,” said Anand Dalmia, co-founder of wealth-tech platform Fisdom.
 

Anand-based MF distributor Nikhil Thakkar said while the direct plan is good from a cost-saving perspective, investment in regular plans comes with proper guidance.

“When the market is not growing, investors need hand holding. The growth in regular plans is also driven by the fact that MF distributors are reaching areas and investor segments where online platforms cannot,”

he said.

However, in terms of growth in retail folios (MF investment accounts), direct remains ahead of regular, owing to a smaller base. As of 2022-end, retail folios in direct plans stood at 35 million, 20 per cent higher than in 2021. In the case of regular, the folio count grew 16 per cent to 105 million. In 2021, the folio growth was 83 per cent for direct and 16 per cent for regular.

Direct plans of mutual funds completed 10 years in India this month. The Securities and Exchange Board of India introduced the option in 2013 for investors who are comfortable making investments themselves. Direct and regular plans have different net asset values. The returns of direct plans are generally around 1 per cent higher than that of regular plans. Though direct plans were introduced 10 years back, they gained traction only in the last few years after fintechs started offering them and promoted them as a cheaper option.