Zerodha, India’s largest discount broker, has applied for a mutual fund license. If all goes well and on time, Zerodha may be able to start its asset management company (AMC) in under a year’s time. Earlier, an in-principle approval was given to NJ India Invest – India’s largest mutual funds distributor in terms of commissions received (in 2018-19) – to set up its own AMC by the capital market regulator, the Securities Exchange Board of India (SEBI). Clearly, some distributors aren’t just satisfied with distributing mutual funds. They want to manage schemes too.
Simple, low-cost products
Zerodha has for long focused on bringing transaction costs down in its discount brokerage business. One way of doing this is to focus on low-cost products. So, the firm has plans to launch low-cost funds. “Passive, simple, cheap index-traded funds will be on offer,” says Nithin Kamath, founder and CEO of Zerodha.
Similarly, NJ India Invest wants to focus on equity funds for now, but mainly on exchange traded schemes to begin with.
“Mutual fund products need to be simplified to attract investments from young investors,” says Kamath. Zerodha started its journey in 2010 as a ‘Rs 20 per order broker’ and gained popularity as a no-frills, low-cost player among traders, especially high-volume derivatives traders.
Zerodha handles four million trades a day on the exchanges. Retail investors also found it attractive to invest in the direct option of mutual fund schemes using the ‘Coin’ platform launched by Zerodha. Coin today has assets under management (AUM) of Rs 5500 crore.
“Investors need options that are aligned with their financial goals,” says Kamath, and hints at the need to roll out schemes that would help youngsters plan for their retirement. “Investment products driven by quantitative strategies will also be an area of interest,” he adds.
“There are many actively-managed open-ended funds out there. However smart beta ETF will be our focus area,” says Neeraj Choksi, co-founder of NJ India Invest. The idea is to bring the benefits of both worlds – the cost effectiveness of ETFs and the benefits of active management.
Rolling out passive funds means that Zerodha and NJ India Invest need not hire a team of highly-paid managers.
“Evolved investors will get some thematic investment ideas on the exchange traded funds platform,” Kamath says, without getting into the finer details.
Suresh Sadagopan, founder of Ladder7 Financial Advisories says, “The new entrants need to adopt a differentiated approach to survive and grow. Low-cost index funds and ETFs offer attractive risk-adjusted returns. Smart beta ETFs bring in much required differentiated flavor to the portfolio”.
Leveraging networks
NJ India has appointed Anand Shah as the chief executive officer of its proposed mutual fund venture. He was earlier the deputy CEO and Head-Investments at BNP Paribas Mutual Fund.
“The new business will be a separate entity and will work on arms’ length basis with the mutual fund distribution business,” says Choksi. Industry experts foresee NJ India Invest leveraging its largest ‘sub-broker’ network to market its products. Both Choksi and Kamath indicated that their distribution firms would continue to sell mutual funds of other fund houses even after their own AMCs are launched. NJ India Invest started its journey in 1994. The gross commission earned by the firm was Rs 807.67 crore in FY2018-2019, as per AMFI data.
As Zerodha follows other new entrants in the Rs 28 trillion mutual fund industry, critics remind us about events in the past where its systems had broken down during market hours, impacting its clients’ ability to trade seamlessly.
Others say Zerodha has been quick to learn and fix mistakes. “The technical glitch issues did not resurface in the recent past. Zerodha has upgraded the technological infrastructure,” says Deepak Shenoy, founder and CEO of Capitalmind Wealth. When Zerodha started its operations, it opted for ILFS Securities Services (ISS) as the depository participant for its clients’ securities. After the debacle of ISS’ parent – Infrastructure Leasing Finance Services – the brokerage took extra efforts to migrate all its existing clients to its own depository service.
Zerodha has been building on to its offering consistently; a 20-level bid-ask data for investors while trading, is the latest from it,” Shenoy adds.
“Zerodha’s success in the asset management business will depend on setting up the right investment team, launching the right product for the right audience at the lowest cost. It is unfair to discredit Zerodha’s AMC plans for the tech glitch the customers experience in the broking business,” says Shyam Sekhar, founder and chief ideator, iThought.
Investors do have high expectations from these new entrants. Experts say that the mutual fund industry has a long way to go, and more firms entering the business will increase competition and benefit all stakeholders.
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