With internet usage increasing in the country, investors are also taking to the online route to buy mutual funds. Online mutual fund intermediaries, who earn commission from the funds they sell, had the first-mover advantage and have witnessed traction in recent times.

But a new set of online mutual fund advisors who enable purchase of direct mutual funds (which have no sales commission) and charge only advisory fee from the investors, are now trying to carve a niche for themselves in the Indian mutual fund industry.

Kunal Bajaj, CEO & Co-Founder of Clearfunds, an online investment advisor, in this exclusive interview with BusinessLine, explains how he proposes to give the best possible advice and the smoothest investment experience at the lowest possible cost to investors.

Can you explain how Clearfunds is different from other advisory platforms in India?

With the new investment advisor regulation, SEBI is sending the message to distributors to not give investors the ‘illusion’ that the advice given to them is free. The regulator wants distributors to charge investors for the advice, as the whole world is moving towards pay-for-advice model.

We want to be where the regulations are taking us. We want to sell only direct plans of mutual funds and charge customers for the advice and transaction as a bundled fee. We also want to remove all the pain points in purchasing direct plans.

We provide a single-point registration for buying schemes from multiple fund houses, we advise investors while facilitating transactions, ensure ease of transaction through superior technology and give investors a consolidated report that covers all their mutual fund transactions.

What about CAMS and MF Utilities, don’t they provide a centralised place for executing mutual fund transactions too?

CAMS can provide you a consolidated report of your MF transactions, but they do not give advice. There is a Mycams app that helps you buy from 17 mutual fund houses but there is no advice element in the CAMS app either.

MF Utilities is owned by mutual fund companies. It is a transaction platform and not an advisory platform. It is owned by AMCs and so they cannot give advice that prefers one AMC over the other.

So investors go to Valueresearch, read The Hindu BusinessLine or watch business channels on TV to help in their decision making. In short, they get advice from one place, do their transaction at another and finally get their reports from another place.

Who are your competitors?

There are three types of competitors. The largest are the banks that sell mutual funds. They are our biggest competitors since most of their customers do not know that they are paying about 1 per cent fee every year. There is a lot of convenience in buying through these bank platforms and customers switch from here only if there is an economic reason to switch.

The second set of competitors are those selling regular plans online. The largest are Fundsindia and Scripbox. In the direct space, there are 4 to 5 guys – Invezta, ORO Wealth, Bharosa Club. But none of us have been able to capture public imagination.

The direct players have not got much funding till now. But we think that is where growth will be as that is where the regulator is pushing us — to segregate commission from advice.

How do you go about advising investors who come to you? Do you do their risk-profiling first?

As of now, we do only a basic risk-profiling. Most of our clients want advice on specific categories of fund. We have a back-tested algorithm, through which we have selected funds in each category, the results of which were published on our blog. So we have selected funds that have consistently outperformed the index and these are recommended to the clients.

Currently it is the same advice for everyone, depending on the category preference of the client. But we will soon be releasing a custom risk-profile where investors have to fill their age, income, goals, dependants and so on, based on which we will recommend a portfolio for the investor, which could be a bunch of 4-5 funds. This will be much more scientific than the risk-profiling done currently.

You are talking about using data analytics and algorithms to give advice. How does that work?

This is actually two months away, but let me run you through it. We’ve made some portfolios that we have back-tested.

You will be assigned a portfolio based on 6-7 questions that you are asked. This is similar to what robo advisors in the US do. When you go to Betterment or Wealthfront, they ask you a bunch of questions, do risk profiling and assign a portfolio to the customer. We give the customers the freedom to move one level up or down in selecting their portfolios, depending on their inclination. These are risk-scoring algorithms.

Your fee of ₹199 per transaction could increase as you move to the model of recommending a portfolio to investors?

When we move to recommending a portfolio, the fee could get cheaper. We currently charge ₹199 for a single scheme when you make a purchase decision. I define purchase decision as a purchase when you make a one-time investment, or make additional investment or set up a SIP. The charge is only at the beginning of the SIP.

When it comes to a portfolio, we will be suggesting 6-7 schemes. We have almost decided on the fee for this service. It will be ₹999 per year. Once you come in, we will recommend a portfolio for you and let you purchase the schemes. The fee will not change whether you invest ₹50,000 or ₹50,00,000. This will be good for customers who invest a larger sum.

If an individual is well-informed, isn’t it better for him to invest directly?

The very well-educated are anyway doing it on their own. But there are many who go to private wealth managers such as India Infoline, Edelweiss, Motilal Oswal and so on. We have 120 crore Indians. There will be a chunk of people who want to do it themselves, a chunk of people who will need service and another chunk who will need full service. We address the needs of people who need advice, execution and reporting, all on one platform at a nominal fee.

Will these portfolios be dynamic? Will there be regular review because the performance of schemes tends to vary quite a lot over a period?

We are not planning to do a review at fixed intervals. If a fund is performing well, there is no need to force people to sell it, just because the portfolio is up for review. At the same time, if fund performance deteriorates dramatically, if the fund manager changes or something drastic happens, we will re-evaluate the portfolio.We also have to see if a rebalancing is in the customer’s interest, whether his tax outgo increases as a result of the rebalancing.

How big is the direct mutual fund segment in other countries?

This kind of embedded commission model where distributors get paid by the AMC happens in very few countries. It occurs in India and I believe in Canada also. In the US or Hong Kong, there is a sales fee. When you go to an intermediary in Hong Kong, they charge you a purchase fee that is loaded on to your cost. This is an entry load.

In foreign markets, investors hold mutual funds with their broker. The broker will keep deducting a processing charge for the mutual funds held. This model of different NAVs for direct and regular plans does not occur in other countries.

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