Will direct plan expenses of MFs go up with execution-only platforms?

Existing platforms that help you buy MFs online have time till September 30 to get registered under either of the categories.

With regulations in place for execution-only platforms (EOP) to enable direct mutual fund (MF) investments, the Securities and Exchange Board of India (SEBI) has made it possible for more such platforms to flourish.

An EOP is meant for direct MF investors who do not wish to avail of any investment advice from distributors or registered investment advisors (RIA). The new EOP rules allow EOPs to act either as agents of asset management companies (EOP 1), or as a stockbroker (EOP 2).

An EOP 1 would need to be registered with the Association of Mutual Funds in India (AMFI), the industry body for India's mutual fund sector.

An EOP 2 would need to be registered as a stock broker with SEBI and can operate only through the platforms provided by stock exchanges.

Existing platforms that help you buy MFs online and can be called as EOPs (such as Paytm Money, Groww, ET Money, and Zerodha Coin) have time till September 30 to get registered under either of the categories.

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Moneycontrol reached out to most of the existing online platforms, but they are still contemplating which licence to go for. To be sure, most direct platforms currently use BSE StarMF or MF Utilities India for transactions processing.

As per industry estimates, about 35-40 percent of new mutual fund investors are acquired via two or three of the biggest direct platforms.

Charges involved

The first big question that investors would face is what would it cost them to buy or sell MFs on such platforms.

Under the new norms, platforms would have the freedom to charge transaction fees. EOPs registered with AMFI can charge a flat transaction fee, which would be borne by fund houses within the upper limit as specified by AMFI. Also, onboarding fees need to be borne by the asset management companies (AMC).

While broker-based EOPs can also levy a flat transaction fee, this would be borne by investors within the upper limit as specified by stock exchanges. Further, on-boarding fees by this category of EOPs may be borne by the AMCs and / or investors.

Impact on investors

Experts believe things won’t change much for investors.

First of all, the fear that AMCs might increase the expense ratio for direct plans to recover the costs they need to bear is unfounded.

Per the SEBI circular, AMCs have been directed that they cannot charge investors any fees or charges paid to EOPs.

Also, the expense ratio for mutual funds is arrived at based on a formula (regular plan TER, less distributor expenses = direct plan TER), which cannot be changed arbitrarily. The cost of managing a mutual fund scheme, expressed as a percentage of its net asset value (NAV), is called its total expense ratio (TER).

“I don't think fund houses have the leeway to hike the TER on direct plans without impacting the TER for regular plans,” said Santosh Navlani, Chief Operating Officer, ET Money, a wealth management platform.

Further, a marketing head at a mutual fund house said that AMCs picking up the charges levied by EOPs would not hit their bottomlines as they’re already paying such charges to platforms such as BSE. “In case of EOP 1, the charges will move from BSE Star MF to either AMCs or Registrar and Transfer Agents (RTA).”

Which way will investors lean?

According to experts, as far as investors are concerned, there will be no difference in choosing either of the EOPs.

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As per Navlani, SEBI has made it clear that stock exchanges will prescribe the upper cap for fees of Category 2 EOPs, while in Category 1, the AMFI will prescribe the upper limit.

“It is likely that both these charges will be in sync. For example, if the maximum fee in category 1 Rs X, category 2 would be about 1-1.05 times that. In any case, in case of EOP 1, the investor would not be bearing the charges,” he said.

“Price sensitivity will ensure that nobody operating as a Category 2 EOP will take the risk of charging higher fees. Besides, EOPs aren’t allowed to value-add, they are there for mere convenience. Hence, the AMFI-prescribed limit cannot be very different from that of stock exchanges,” he said.

Mind the higher charge

According to Dhirendra Kumar, Chief Executive Officer, Value Research, an online MF analysis firm, even with the new regulations, EOPs would not be able to charge much.

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“They will try to get some flat fee from AMCs, but that won't be anything meaningful, and if it becomes meaningful, then investors should be wary of it. Because then platforms would be hawking products that will be in their best interests. Anybody can push things on their homepage,” said Kumar.

Once EOPs are aligned with either the AMFI or stock exchanges, it would be interesting to see how EOPs make buying and selling easier, what schemes get hawked, and how they differentiate from one another.

The EOPs are here and they may have varied business models, however, it is not mandatory for the investors to go and transact on one of these platforms. Though such platforms may offer value-added services, small investors content with one or two fund houses may continue to transact on the websites of the mutual funds. For example, a passive investor content with index funds need not necessarily invest across fund houses if one or two fund houses are offering required strategies.