News Analysis

Spike in retail MF investments thru distributor route

DHURAIVEL GUNASEKARAN ANAND KALYANARAMAN BL Research Bureau | Updated on January 09, 2018 Published on November 05, 2017

‘Note ban’ effect, better marketing and higher distributor commissions spur MFs



Almost a year after demonetisation, mutual fund distributors have reason to rejoice. Retail investors have poured money into mutual funds, and much of this has been routed through distributors.

Data from mutual fund industry body AMFI show that total retail assets under management (AUM) grew about 41 per cent year-on-year to ₹4.69-lakh crore as of September 2017. Of this, retail AUM through the distributor route (regular plans) grew at a much faster pace than retail AUM through direct plans, in which investors put money directly in funds bypassing distributors to save on commissions.

As of September 2017, retail AUM through distributors went up to about ₹4.26-lakh crore, growing 44 per cent y-o-y. This was much higher than the 17 per cent y-o-y increase in retail AUM through the direct route to about ₹43,400 crore as of September 2017.

The faster pace in distributor-led retail AUM growth over the past year represents a break from what was seen in recent years.

As of September 2016 and September 2015, retail AUM through distributors grew 30 per cent and 20 per cent y-o-y, respectively, lagging the 46 per cent and 23 per cent y-oy growth in retail AUM through the direct route.

Inflection point

Interestingly, the inflection point came in November 2016, the month demonetisation was announced. That month, direct retail investors pulled out investments worth about ₹12,000 crore, nearly a third of their AUM as on October 2016.

The sharp fall in direct retail investments in liquid funds in November suggests that these assets were used to tide over the fund crunch following the note ban. In contrast, retail investors through the distributor route invested about ₹4,200 crore in November 2016.

In the subsequent months, retail investor flows have been positive through both the direct and distributor routes. But the impact of the major divergence in November 2016 is being seen in the AUM growth rates even now.

Factors that helped

Distributors were also able to tap into key changes to increase their share of the retail AUM last year. First, demonetisation acted as a catalyst to deploy cash deposited in bank accounts into mutual funds and other assets.

The financialisation of savings also got a boost from the lacklustre returns from real assets such as real estate and gold, low rates on bank deposits, and the superior returns from equities. Distributors were able to make the most of this.

“The persistent efforts of the retail distribution channel to present mutual funds as a good alternative to traditional investment options is bearing fruit,” says Ajit Menon, Chief Business Officer, DHFL Pramerica Asset Managers. Next, the high-visibility marketing and awareness campaigns being conducted by AMFI and various fund houses have aided the flow of investor money into mutual funds. “There is no doubt that AMFI’s ‘Mutual Funds Sahi Hai’ campaign has helped,” says Menon.

The growth has been faster in smaller locations, particularly in B15 locations – that is, areas beyond the top 15 (T15) locations. Distributors have benefited from this.

“Usually, B15 investors are new or first-time investors who need advice and handholding for their investments in mutual funds,” says Neil Parag Parikh, Chairman and CEO, PPFAS Mutual Fund. Sundeep Sikka, ED and CEO, Reliance Mutual Fund concurs, “Access to and penetration of mutual funds are still very low in B15 locations. Thus, the distribution channel is the most important link between investors and mutual funds.”

Regulatory push has also helped.

“Along with SEBI, AMFI has strived to widen the distributor base, which has helped mutual funds make inroads into the hinterlands,” says Raghav Iyengar, Head- Retail & Institutional Business, ICICI Prudential AMC.

“Distributors have got extra incentive in terms of higher commissions from B15 cities compared to T15 cities,” adds Parag.

As of September 2017, retail AUM through distributors in B15 locations grew about 51 per cent y-o-y compared with 6 per cent growth in direct retail AUM.

In T15 locations, retail AUM through distributors grew 41 per cent y-o-y compared with 23 per cent growth in direct retail AUM.

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