While direct share class and different expense ratio are some of the features available in developed markets, is our market currently prepared for the same. We could probably introduce such quantum change in a step by step method. Maybe start off with liquid funds, debt funds and based on their success provide the same to a few MIP or Hybrid funds. The proposed regulation of introducing direct share class across all asset class and offering lower TER for direct investors would result in driving the last nail in the coffin of the IFA community.
Following are some factors against introduction of direct share class, across the board:
1) Mutual Funds as a concept was introduced to cater to those investors who are not savvy enough to make their own investments in equity markets. While direct equity option is available for savvy investors through a huge network of stock broker and sub-brokers across the country, what is the need for introducing a direct share class in Mutual Fund investment? If an investor is savvy enough, he would anyways prefer a direct equity investment. Is this not defeating the very premise on which mutual fund investments were introduced?
2) Currently there are 40+ AMCs offering hundreds of schemes and this number increases with every new launch. How would an investor make the right choice and decide on the right scheme for his investment among the maze of options available to him? Under these circumstances would he not be confused and make a wrong choice? If he loses his money due to his own wrong choice, what are the chances that he would ever come back for a Mutual Fund investment in the future? Are we not running the risk of losing an investor permanently? On one hand an IFA does all the ground work and sources an investor, on the other hand due to lack of guidance, in doing a direct investment, if he loses his hard earned money, he would leave the system. This would result in a leaking bucket situation. How would this help in increasing market penetration?
3) Expansion of any market directly depends on the width of the distribution network. If more number of investors, due to the lure of reduced expense ratio, switch from a distributor to direct investments, it would directly affect the revenue stream of an IFA. With dwindling revenue an IFA would find it difficult to remain afloat and soon abandon the business and start looking for greener pasture. We will again encounter an exodus of IFAs, just like post August 2009. Without width, how will an industry survive and grow?
4) Sourcing apart, there are various servicing activities like change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, hand holding on minor investments, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc etc. The list is endless. With the absence of an IFA, how would the investor carry out such transactions? Does the AMCs have the bandwidth to handle such transactions? Would this not result in customer grievance? One dissatisfied customer would stop 10 prospects from investing. Is this what we want to achieve?
5) A direct investor would be largely guided by on-line sites promoting mutual fund performance. What is the guarantee of these sites providing unbiased information? Further these sites do not offer periodical reviews or counseling, which is a much needed activity for helping the investor staying on course or making course corrections. Lack of this service would leave an investor stranded.
During these uncertain times, where we have many villains in the form of global crises, dwindling volumes, raising inflation, falling rupee, the last thing we need is one more villain. The need of the hour is a Super Hero and we look upon “The SEBI” as a Super Hero. These are the times where we need support, guidance and motivation. The biggest motivation that SEBI could provide us is to reconsider the proposed norm of introduction of lower TER for direct class and help us focus on what we are best at doing – Taking good care of our investors and their wealth.